Question

The unadjusted trial balance at year-end for a company that uses the percent of receivables method to determine its bad debts expense, reports the following selected amounts:Accounts receivable $ 437,000 DebitAllowance for Doubtful Accounts 1,270 DebitNet Sales 2,120,000 CreditAll sales are made on credit. Based on past experience, the company estimates 2.5% of ending account receivable to be uncollectible. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense?

Answer 1

Answer:

Profit and Loss - Increase in Provision for Doubtful debts $  9,655 (debit)

Provision for Doubtful debts $ 9,655 (credit)

Explanation:

Note that the Provision for Doubtful debts is estimated at 2.5% of ending account receivable.

Thus the amount of the Provision is $ 437,000 ×  2.5% = $ 10,925

The Amount of Estimated Doubtful debts before adjustments was estimated at $ 1,270

Comparison with the amount we calculated of the Provision, we have an increase of $ 9,655 ( $ 10,925 - $ 1,270 )

Increase or Decrease in the Provision for doubtful debts should be adjusted in the Profit and Loss account as follows :

Profit and Loss - Increase in Provision for Doubtful debts $  9,655 (debit)

Provision for Doubtful debts $ (credit)