Australia. inc. had a $140,000 beginning balance in accounts receivable and a $5,000 credit balance in the allowance for doubtful accounts. during the year, credit sales were $800,000 and customers' accounts collected were $810,000. also, $4,000 in worthless accounts were written off. an aging of the accounts indicates that 5% of the end-of-the-year accounts receivable balance is doubtful for collection. what amount of bad debts expense should be provided at year-end?

(a) $6,300
(b) $7,300
(c) $7,600
(d) $5,300

(D) $5,300

Explanation:

During the year, credit sales were $800,000 => Accounts Receivable increased $800,000

Customers' accounts collected were $810,000=> Accounts Receivable decreased $810,000

The company wrote off $4,000 in worthless accounts => Accounts Receivable decreased $4,000 and the Allowance for Doubtful Accounts decreased $4,000

At the end of the year, before adjusting, the balance of

Accounts Receivable = $140,000+$800,000-$810,000-$4,000 = $126,000

Allowance for Doubtful Accounts = $5,000-$4,000 = $1,000

Bad Debts were estimated: 5% x $126,000 = $6,300

Bad Debts Expense should be provided: $6,300-$1,000 = $5,300

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