On average, 5% of total accounts receivable has been uncollectible in the past. At the end of the year, the current balance of accounts receivable is $100,000. The allowance for doubtful accounts has an unadjusted debit balance of $500. Credit sales during the year were $150,000. The estimated bad debt expense is:
A) $4,500.
B) $5,000.
C) $5,500.
D) $7,000.

Question

Quizplus · Accepted Answer

First, we need to calculate the estimated uncollectible amount for the current year based on the historical average of 5%:
Estimated uncollectible amount = 5% x $150,000 credit sales = $7,500

Next, we need to calculate the required balance for the allowance for doubtful accounts based on the current balance of accounts receivable:
Required balance for allowance = 5% x $100,000 accounts receivable = $5,000

Since the allowance for doubtful accounts currently has a debit balance of $500, we need to adjust it by adding the required balance:
Adjustment to allowance = Required balance - Unadjusted balance
Adjustment to allowance = $5,000 - (-$500) = $5,500

Therefore, the estimated bad debt expense for the year is equal to the adjustment to the allowance:
Estimated bad debt expense = $5,500

Therefore, the best choice is C as it correctly calculates the estimated bad debt expense based on the information given.

On Average, 5% of Total Accounts Receivable Has Been Uncollectible