Wren Company had the following account balances at December 31, Year 1

 Wren Company had the following account balances at December 31, Year 1:



Accounts receivable    $ 900,000
Allowance for doubtful accounts (before any provision for Year 1 doubtful accounts expense)    16,000
Credit sales for Year 1    1,750,000


     Wren estimates uncollectible based on 5% of accounts receivable.
          


What amount should Wren charge to doubtful accounts expense?



$71,500
$87,500
$45,000
$29,000 Correct
 You Answered Correctly!
This answer is correct. When doubtful accounts expense is estimated based on accounts receivable, the beginning balance in the allowance account must be considered.



(Accts. Receivable)    ×    (Bad debt rate)    =    Allowance
     $900,000
×    5%    =    $45,000


Since the allowance account already has a credit balance of $16,000, doubtful accounts expense of $29,000 must be recorded to bring the allowance up to $45,000 ($45,000 − $16,000 = $29,000).