Question

A company has $100,000 in "outstanding accounts receivable" and it uses the allowance method to account for uncollectible accounts. Experience suggests that 4% of outstanding receivables are uncollectible. The current balance (before adjustments) in the allowance for doubtful accounts is a(n) $900 debit. The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for:
A. None of these is correct.
B. $4,000
C. $3,100
D. $4,900
E. $900

Answer 1

Answer:

D. $4,900

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.

Amount of uncollectible debt estimated

= 4% * $100,000

= $4,000

This represents what the balance in the allowance for doubtful debt account should be at the end of the period. Since the account has a debit of $900, the amount to be posted will be a credit of

= $4,000 + $900

= $4,900

The corresponding debit entry will be posted to bad debts expense.