Question

Wellington Corp has $5 million in accounts receivable, sales on credit of $25 million, and a $20,000 debit balance in the allowance for doubtful accounts. If 8% of the receivables will be uncollectible, what is the balance in the allowance after the year-end adjustment for bad debt expense?

A. $2,000,000
B. $380,000
C. $400,000
D. $420,000

Answer 1

After the year-end adjustment, the balance in the allowance for doubtful accounts at Wellington Corp would be $380,000. This is calculated by taking 8% of the $5 million accounts receivable and adjusting the existing $20,000 debit balance in the allowance.

Step-by-step explanation:

To calculate the new balance in the allowance for doubtful accounts after the year-end adjustment at Wellington Corp, we first need to find 8% of the accounts receivable. This is calculated as $5 million x 0.08 = $400,000. To find the year-end balance, we adjust the existing allowance for doubtful accounts by this amount. The current allowance has a debit balance of $20,000, which should be subtracted from the calculated uncollectible amount. Therefore, the adjusted allowance for doubtful accounts would be $400,000 - $20,000 = $380,000.