Question

Bright Electronics uses the percentage of receivables method for estimating bad debts expense. The Accounts Receivable balance is $150,000 at year-end and the total credit sales were $700,000. Management estimates that 5% of receivables will be uncollectible. What adjusting entry will be recorded if the Allowance for Doubtful Accounts has a credit balance of $800 before adjustment?

Answer 1

Answer:

Bad Debts Expense A/c             Debit                 $6,700

        To Allowance for Doubtful Debts                                      $6,700

Explanation:

Total sales = $700,000

Total receivables balance at year end = $150,000

Estimate of allowance for doubtful debts = 5%

Therefore, balance of allowance for doubtful debts at year end shall be =

$150,000 $\times$ 5 % = $7,500

Existing balance of allowance for bad debts = $800 Cr.

Balance to be added = $7,500 - $800 = $6,700

For which entry will be

Bad Debts Expense A/c             Debit                 $6,700

        To Allowance for Doubtful Debts                                      $6,700

Further Bad Debt Expense will be transferred to Income Statement and Allowance for Doubtful Debts will be shown as negative value from Accounts Receivables.