Oriole Company has outstanding accounts receivable totaling $1.26 million as of December 31 and sales on credit during the year of $6.24 million. There is also a debit balance of $5900 in the allowance for doubtful accounts. If the company estimates that 2% of its accounts receivable will be uncollectible, what will be the balance in the allowance for doubtful accounts after the year-end adjustment to record bad debt expense?

$19,600.

Explanation:

The prudence concept of Accounting, also known as Conservatism Principle, requires management to record loss if there is an expectation to incur it. This principle gave birth to the concept of Bad Debts. Companies estimate the amount of Accounts Receivable that will not be collectible by Aging. An expense is recorded in the Statement of Profit or Loss by the calculated amount, whereas a credit entry to match the debit is charged to Allowance for Doubtful Account which is a contra-asset account to Accounts Receivable.

Oriole has estimated that $25,500 (2% of 1.26 million) of receivables will be uncollectible. A debit entry for Bad Debts is recorded in P&L and a credit to it will be charged to Allowance for Doubtful Account. This contra-asset account already has a opening debit balance of $5,900, the balance after adjustment for bad debts will be $19,600 (25,500 - 5,900).

$25,200

Explanation:

Allowance for doubtful accounts should have a credit balance since it is a contra asset account that reduces the value or accounts receivable. In this case, the account has a debit balance, so the adjusting entry should be:

December 31, adjusting entry allowance for doubtful accounts:

Dr Bad debt expense 31,100

    Cr Allowance for doubtful accounts 31,100

that way the final balance of allowance for doubtful accounts = $31,100 - $5,900 = $25,200

the third answer is correct.