Question

Cheyenne Corp. uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $170000 and credit sales are $1710000. Management estimates that 5% of accounts receivable will be uncollectible. What adjusting entry will Cheyenne Corp. make if the Allowance for Doubtful Accounts has a credit balance of $3400 before adjustment?

Answer 1

Answer:

Adjusting entry amount shall be $ 5,100

Explanation:

Computation of adjustment to Allowance for Doubtful accounts

Accounts Receivable balance                                             $ 170,000

Percentage of allowance for Doubtful accounts                     5 %

Allowance for Doubtful accounts - $ 170,000 * 5%            $ 8,500

Existing balance of Allowance for Doubtful accounts        $ 3,400

Adjusting entry to Allowance for Doubtful accounts         $ 5,100                

Answer 2

Answer:

Debit Bad debt expense $5,100

Credit Allowance for doubtful debit $5,100

Explanation:

When a company makes sales on account, debit accounts receivable and credit sales. Based on assessment, some or all of the receivables may be uncollectible.  

To account for this, debit bad debit expense and credit allowance for doubtful debt. Should the debt become uncollectible (i.e go bad), debit allowance for doubtful debt and credit accounts receivable.

Where a debit that had previously been determined to have gone bad gets settled, debit cash and credit bad debts expense.

If the company estimates that 5% of accounts receivable will be uncollectible, then amount estimated

= 5% × $170,000

= $8,500

Given that the Allowance for Doubtful Accounts has a credit balance of $3400, additional amount required

= $8,500 - $3,400

= $5,100