Question

At December 31, 2012, SPK Inc reported the following information on its balance sheet:

Accounts Receivable 900,000

Allowance for Doubtful Accounts 54,000 (credit)

During 2013, the company had the following transactions related to receivables:

Sales on Account 3,000,000

Collections on Account 2,850,000

Write-offs of uncollectible accounts 60,000

Recovery of previously written off accounts 12,000

A) Assume that bad debts are estimated to be 5% of year end receivables, determine the Net Realizable Value (after adjustments) of Accounts Receivable.

B) If bad debts are estimated to be 1.5% of credit sales, determine the ending balance in the Allowance for Doubtful Accounts after adjustment.

Answer Key says

A) 940,500

B) 51,000

Answer 1

a)	Accounts Receivable Balance at Year end
	Accounts Receivables, Beg. Balance	900000
	Add: Sales on Accounts	3000000
	Less: Collection on Account	2850000
	Less: Uncollectible accounts written off	60000
		990000
	Bad debts @ 5% of 990000	49500
	Net Realizable of Accounts Receivable	940500
	(990000 - 49500)
b)	Bad debt expense @ 1.5% of 3000000	45000
	Add: Debit Balance in Allowance account (60000-54000)	6000
		51000

In the case of question B, the ending balance in allowance of doubtful accounts would be 45000, and bad debt expense to be recognised during the year would be 51000.