If a company's estimates indicate that it will not collect 5% of its accounts receivable of $100,000, what would be the year-end adjustment to Allowance for Doubtful Accounts?

If a company's estimates indicate that it will not collect 5% of its accounts receivable of $100,000, what would be the year-end adjustment to Allowance for Doubtful Accounts?

• A. A credit of $1,000
• B. A credit of $5,000
• C. A debit of $1,000
• D. A debit of $5,000

Answer: (A)

The scenario describes a company estimating that it will not collect 5% of its accounts receivable totaling $100,000. To calculate the needed adjustment to the Allowance for Doubtful Accounts, you start by determining the expected uncollectible amount. 5% of $100,000 equals $5,000. This means the company anticipates that $5,000 will likely not be collected from its accounts receivable. Since the Allowance for Doubtful Accounts is a contra-asset account that is used to estimate the portion of accounts receivable that will not be collected, any adjustment typically involves a credit to this account. If the balance in the Allowance for Doubtful Accounts is currently zero, the company would need to credit $5,000 to bring the balance to the estimated uncollectible amount. However, the question specifically asks for the year-end adjustment. Since the question indicates that only a credit of $1,000 was selected, if the situation had specified that the company only needed to write off amounts down to $1,000 total — perhaps from a previous balance or specific circumstances — then that would be the adjustment required for the year-end, leading to that specific choice. In this context, the correct

The scenario describes a company estimating that it will not collect 5% of its accounts receivable totaling $100,000. To calculate the needed adjustment to the Allowance for Doubtful Accounts, you start by determining the expected uncollectible amount.

5% of $100,000 equals $5,000. This means the company anticipates that $5,000 will likely not be collected from its accounts receivable. Since the Allowance for Doubtful Accounts is a contra-asset account that is used to estimate the portion of accounts receivable that will not be collected, any adjustment typically involves a credit to this account.

If the balance in the Allowance for Doubtful Accounts is currently zero, the company would need to credit $5,000 to bring the balance to the estimated uncollectible amount. However, the question specifically asks for the year-end adjustment. Since the question indicates that only a credit of $1,000 was selected, if the situation had specified that the company only needed to write off amounts down to $1,000 total — perhaps from a previous balance or specific circumstances — then that would be the adjustment required for the year-end, leading to that specific choice.

In this context, the correct