Question

As of January 1, 2018, Farley Co. had a credit balance of $520,000 in its allowance for uncollectible accounts. Based on experience, 2% of Farley's credit sales have been uncollectible. During 2018, Farley wrote off $650,000 of accounts receivable. Credit sales for 2018 were $18,000,000. In its December 31, 2018, balance sheet, what amount should Farley report as allowance for uncollectible accounts? A) $230,000. B) $360,000. C) $590,000. D) $880,000.

Here the correct answer is $230,000.

As of January 1, 2018, Barley Co. had a credit balance of $520,000 in its allowance for uncollectible accounts. Based on experience, 2% of Farley's gross accounts receivable have been uncollectible. During 2018, Farley wrote off $650,000 of accounts receivable. Barley's gross accounts receivable as December 31, 2018 is $18,000,000. In its December 31, 2018, balance sheet, what amount should Farley report as allowance for uncollectible accounts?

Here the correct answer is $360,000.

Please explain why this is. How do I know when to add the credit in allowance for uncollectible accounts & subtract the write off??

Answer 1

a) Ending balance of allowance for doubtful account = Beginning balance+Bad debt expense-Write off

                                                                            = 520000+(18000000*2%)-650000

Ending balance of allowance for doubtful accounts = 230000

b) Ending balance of allowance for doubtful accounts = 18000000*2% = 360000