Arundel Company uses percentage of sales to estimate uncollectibles. At the end of the fiscal year, December 31, 2018, Accounts Receivable has a balance of $78,000 and had a total of $805,000 in credit sales. Arundel assumes that 2.0% of sales will eventually be uncollectible. before adjustment, the Allowance for Uncollectible Accounts had a credit balance of 4,000. What dollar amount should be credited to Allowance for Uncollectible Accounts at year end?

Answer: The dollar amount that should be credited to Allowance for Uncollectible Accounts at year end is $12,100.

Explanation: As provided in the question, Arundel Company already had a credit balance of $4,000 in allowance for uncollectible accounts, before adjustment. Remember, the allowance account is usually in credit balance and mapped to the accounts receivable account to show the net balance of the receivables that is recoverable, and to show the true and fair position of that amount.

The 2% of credit sales (2% of $805,000) is $16,100 - this should serve as additional provision for bad debts expense at year end and the following journals should have been recorded: Debit Bad debt expense $16,100; Credit Allowance for uncollectible accounts $16,100. But there is $4,000 balance in the allowance account, which serves as the opening balance. The amount deemed irrecoverable during the year is $16,1000, which should represent the additional provision but since there is an exisiting balance in the allowance account, the differential would be recorded as additional provision ($16,100 - $4,000).

The dollar amount that should be credited to Allowance for Uncollectible Accounts at year end is $ 12,100

Explanation:

Providing allowance for doubtful debts

A provision is made for the debts which are likely to be uncollectable by a company. This amount is used to adjast the Trade Receivable balances to show a faithful representation of assets a beusiness has at end of year.

Calculations

December 31, 2018 Arundel Company's Allowance for Doubtful debts is calculated as follows

Credit Sales * % of allowed provision

$805,000 * 2.0%

$16,100

Adjastment to be done in Allowance for Doubtful Debts Account:

Hint : Open Allowance for Doubtful Debts T Account:

Credits:

Opening Balances 4,000

Balancing Figure (Profit and Loss) 12,100

Totals 16,100

Debit:

Closing Balance 16,100

Totals 16,100