Question

Giovanni runs a greenhouse as a sole proprietorship using the accrual method. At the end of the taxable year, Giovanni’s accounts receivable totals $45,000, and he estimates that 3.5% of that amount is uncollectable. The current balance in his reserve for uncollectable accounts is $950. As of the end of the year, Giovanni is aware of only one customer who will certainly not pay its account because it has gone out of business; that customer’s receivable balance is $2,250. Determine the amount of bad debt Giovanni may deduct for the current taxable year.

Answer 1

Accounts receivable balance		45000
Less: Amount to be written off		2250
Remaining Accounts receivable balance	42750
Multiply: Estimated uncollectible	3.50%
Required balance of Reserve for uncollectible	1496.25
Reserve balance -Credit		950
Less: Amount to be written off		-2250
Remaining balance of reserve-Debit	1300
Add: Required balance of Reserve	1496.25
Bad debts expense			2796.25
Answer is $2796.25