For several years, sales have been on a "cash only" basis. On January 1, 2005, however, Litespeed Co. began offering credit on terms of n/30. The amount of the adjusting entry to record the estimated uncollectibles receivables at the end of each year has been 1/4 of 1% of credit sales, which is the rate reported as the average for the industry. Credit sales and the year-end credit balances in Allowance for Doubtful Accounts for the past four years are as follows:

Year Credit Sales Allowance for Doubtful Accounts
2005 $8,160,000 $8,520
2006 8,400,000 15,840
2007 8,520,000 22,680
2008 8,700,000 32,820

Ursula Sykes, president of Litespeed Co., is concerned that the method used to account for and write off uncollectible receivables in unsatisfactory. She has asked for your advice in the analysis of past operations in this area and for recommendations for change.

Determine the amount of (a) the addition to Allowance for Doubtful Accounts and (b) the accounts written off for each of the four years.
Prepare a memo to Ursula Sykes advising whether you believe the estimate of 1/4 of 1% of credit sales appears reasonable. Also include what you have determined to be the balance in the Allowance for Doubtful Accounts at December 31, 2008. Recommend any possible changes that you feel may be necessary in accounting for uncollectible receivables. Support your findings.

HERE's the Answer:

YEAR ADA Write Off
2005  20,400  11,880
2006  21,000  13,680 
2007  21,300  14,460
2008  21,750  11,610

BUT it does not make sense to me... I need help with the accounting logic behind this problem. It appears illogical to me. Thanks.

The write off is the problem, in the answer ADA is the adjusting entry which works fine the way it is. How do you calculate 2005 year end when you begin with a ADA balance of 0?

Thanks

but can you show me and explain how they come up with the answer I don't get it