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30 August, 12:54

Net credit sales for the month are $4,000,000 for Marx Clothiers. Its accounts receivable balance is $160,000. The allowance is calculated as 7.5% of the receivables balance using the percentage of receivables basis. The Allowance for Doubtful Accounts has a credit balance of $5,000 before adjustment. How much is the balance of the allowance account after adjustment?

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  1. 30 August, 14:09
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    Credit balance of $12,000

    Explanation:

    To calculate the balance of the allowance for doubtful accounts we need to multiply the total accounts receivable times the percentage of estimated bad debts:

    $160,000 x 7.5% = $12,000

    Since allowance for doubtful accounts is a contra asset account, when it increases it should be credited.
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