Big Problem Ltd., an oil refining business uses an allowance system to account for bad debts. At the beginning of the year the allowance had a credit balance of $16,000. The following transactions took place during the year.
a) Total sales of $1,200,000 were recorded during the year; 90% of which were credit sales.
b) Accounts receivable collections totaled $900,000. The closing accounts receivable balance was $380,000
c) Accounts receivable totaling $48,500 were written off during the year.
d) Bonita Ltd., which owed $6,000, was one of the accounts that were written off in c)
above. Bonita subsequently paid $4,000. This $4,000 is not included in the cash collections of $900,000.
e) Big Problem estimates that 8.00% of their ending accounts receivable will be uncollectible.
Required -
a) What is the opening accounts receivable balance?
b) Based on the ending accounts receivable balance and all of the above information still holding true, by what amount should the allowance account be adjusted?
c) Assume now that BP estimates that bad debt expense should be 4.2% of credit sales. If items a through d from above are still true, what would be the balance of the allowance account at year end?