Question

Omega Company has provided the following information prior to any year-end bad debt adjustment:

·       Cash sales are $150,000

·       Credit sales are $450,000

·       Accounts receivable (gross) are $110,000

·       Allowance for doubtful accounts balance is $1,200

Omega prepares an aging of accounts receivable and the result shows that 5% of gross accounts receivable is estimated to be uncollectible. What is the balance in the allowance for doubtful accounts after the bad debt expense is recorded?

           A) $5,500

           B) $6,700

           C) $4,240

           D) None of the above

Answer 1

The Correct answer is Option A $5,500

Under the aging of accounts receivable method

The desired balance in allowance for doubtful accounts  after recording bad debt expense is

5% of Accounts receivable gross = 5% of $110,000 = $5,500

As allowance for doubtful accounts has balance prior to adjustment is $1,200 (credit) , bad debt expense is recorded as $5,500 - $1,200 = $4,300

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