Calistoga Produce estimates bad debt expense at 0.50% of credit sales. The company reported accounts receivable and allowance for uncollectible accounts of $476,000 and $1,570 respectively, at December 31, 2015. During 2016, Calistoga’s credit sales and collections were $323,000 and $307,000, respectively, and $1,730 in accounts receivable were written off. Calistoga’s adjusted allowance for uncollectible accounts at December 31, 2016, is:
The correct answer and explanation is:
To calculate Calistoga Produce’s adjusted allowance for uncollectible accounts at December 31, 2016, follow these steps:
Step 1: Determine bad debt expense for 2016
The company estimates bad debt expense as 0.50% of credit sales.
- Credit sales for 2016 = $323,000
- Bad debt expense = 0.005 × $323,000 = $1,615
Step 2: Start with the beginning allowance for uncollectible accounts
At December 31, 2015:
- Beginning allowance for uncollectible accounts = $1,570
Step 3: Account for write-offs
During 2016, the company wrote off $1,730 of accounts receivable as uncollectible. Write-offs reduce the allowance account directly:
- Allowance after write-offs = $1,570 − $1,730 = $(160) (negative balance)
Step 4: Add bad debt expense to adjust the allowance
Bad debt expense recorded during the year replenishes the allowance account:
- Allowance after bad debt expense = $(160) + $1,615 = $1,455
Final Adjusted Allowance for Uncollectible Accounts
At December 31, 2016, the adjusted allowance for uncollectible accounts is:
- $1,455
Explanation:
The allowance for uncollectible accounts reflects the company’s estimation of accounts receivable that will not be collected. At the start of the year, Calistoga had $1,570 set aside for bad debts. However, during the year, $1,730 was written off as uncollectible, reducing the balance to a negative $160. To account for new potential bad debts, the company estimates bad debt expense at 0.50% of its credit sales ($1,615). Adding this amount back to the allowance adjusts it to $1,455 by the end of 2016.
This process ensures the allowance accurately reflects the estimated uncollectible portion of accounts receivable, aligning with the matching principle in accounting by recognizing bad debt expense in the same period as related sales.