At the beginning of the year, Mitchum Enterprises allows for estimated uncollectible accounts of $14,000. By the end of the year, actual bad debts total $15,000. Record the write–off to uncollectible accounts. Following the write-off, what is the balance of Allowance for Uncollectible Accounts?
The correct answer and explanation is :
To record the write-off of uncollectible accounts for Mitchum Enterprises, we need to follow the accounting process for bad debts.
Journal Entry for Write-Off:
When actual bad debts total \$15,000 by the end of the year, this amount must be written off. This means that the company removes the uncollectible accounts from the accounts receivable and reduces the allowance for uncollectible accounts.
The journal entry for the write-off is:
Debit: Allowance for Uncollectible Accounts \$15,000
Credit: Accounts Receivable \$15,000
The entry reflects that the accounts receivable balance is reduced by \$15,000, and the allowance for uncollectible accounts is also reduced by the same amount. The “Allowance for Uncollectible Accounts” is a contra-asset account, meaning it reduces the total value of accounts receivable.
Balance of Allowance for Uncollectible Accounts After the Write-Off:
At the beginning of the year, Mitchum Enterprises had an estimated uncollectible accounts balance of \$14,000. The write-off reduces this balance by \$15,000, as mentioned above. However, the allowance balance after the write-off also depends on any subsequent adjustments to the allowance account (for example, if Mitchum Enterprises estimates additional bad debts).
After the write-off, the new balance in the Allowance for Uncollectible Accounts is calculated as follows:
- Beginning balance of Allowance for Uncollectible Accounts: \$14,000
- Write-off: \$15,000 (debited to the allowance account)
New balance in Allowance for Uncollectible Accounts = \$14,000 – \$15,000 = -\$1,000
This indicates that the company has written off more than its estimated uncollectible accounts, leaving the allowance with a negative balance of \$1,000. This negative balance suggests that the company needs to adjust the allowance account further, either by increasing the estimate for future bad debts or by recording an expense to replenish the allowance.
Conclusion:
The write-off reduces the allowance for uncollectible accounts, and the company must adjust its allowance to cover any future bad debt estimates. After the write-off of \$15,000, the allowance for uncollectible accounts has a negative balance of \$1,000.