Reference no: EM132315435

Question

The allowance method requires that gross accounts receivable be reduced by an estimate of un-collectability. There are two ways to calculate this estimate:1) % of sales (or % of a/r) and 2) an aging of the individual accounts receivable customer balances.

The balance in the Allowance for Uncollectible Accounts is subtracted from Accounts Receivable so that the reported balance is shown at Net Realizable Value. Try this activity

The December 31st, Balance Sheet shows:

Accounts Receivable $ 100,000

less: Allowance for uncollectible accounts (5,000)

Net Accts. Receivable $ 95,000

During the year, the following activity occurred in the Accounts Receivable account.

Sales on credit $ 650,000

cash collections $ 635,000

bad debt write-offs $ 2,500

1) Before the year-end adjustment, what is the ending balance in the allowance for uncollectible accounts?

2) What is the balance in gross accounts receivable at year end?

3) (a) Using a rate of .5% of sales, what is the adjusting journal entry to the allowance for uncollectible accounts?

(b) Based on an aging of the year-end accounts receivable, the allowance should be $8,000, what is the appropriate adjusting entry to the allowance?