Smith & Sons uses the allowance method of handling its credit losses. It estimates credit losses at two percent of credit sales, which were $2,000,000 during the year. On December 31, the Accounts Receivable balance was $300,000 and the Allowance for Doubtful Accounts had a credit balance of $21,400 before adjustments. Show how accounts receivable and the allowance for doubltful accounts would appear in the December 31 Balance Sheet.

$238,600

Explanation:

Firstly, we need to compute the amount of bad debt

= Credit sale × Bad debt expense

= $2,000,000 × 2%

= $40,000

The adjusted balance of allowance will be the addition of unadjusted balance of allowance account and the bad debt expense

= $21,400 + $40,000

= $61,400

The , the balance will be :

Accounts receivables = $300,000

Less: Allowance for doubtful account = ($61,400)

Net realizable value of account receivable = $238,600

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