Roster Co. adjusts its allowance for uncollectible accounts at year-end. The general ledger...

Question:

Roster Co. adjusts its allowance for uncollectible accounts at year-end. The general ledger balances for the accounts receivable and the related allowance account before adjustment were $1,500,000 and $45,000, respectively.

Roaster uses the percentage-of-receivable method to estimate its allowance for uncollectible accounts. Accounts receivable were estimated to be 4% uncollectible.

What amount should Roaster record as an adjustment to its allowance for uncollectible accounts at year-end?

Accounts Receivable:

Accounts receivable is a current asset. It is the amount owed by customers in the normal course of business. It is reduced by the allowance for uncollectible accounts to get the net realizable value.

Answer and Explanation:

The percentage of receivable method is used to determine the required allowance for uncollectible accounts at the end of a period. Let us compute the required allowance for uncollectible accounts.

  • Required allowance for uncollectible accounts = Accounts receivable x Percentage
  • Required allowance for uncollectible accounts = $1,500,000 x 4% = $60,000

The required allowance for uncollectible accounts is $60,000.

Since the required balance is greater than the unadjusted balance, we increase the allowance for uncollectible accounts.

  • Adjustment = Required balance - Unadjusted balance
  • Adjustment = $60,000 - $45,000 = $15,000 increases

Roaster should increase the allowance for uncollectible accounts by $15,000.


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Accounts Receivable: Definition, Process & Examples

from Accounting 101: Financial Accounting

Chapter 7 / Lesson 1
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