Question

Finish Co. uses the allowance method to account for bad debts. At the end of 2010, Finish Co.'s unadjusted trial balance shows an accounts receivable balance of $30,000; allowance for doubtful accounts balance of $200 (credit); and sales of $600,000. Based on history, Finish estimates that bad debts will be 1% of sales. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of:
a. $500
b. $6,200
c. $100
d. $5,800
e. $6,000

Answer 1

Answer:

The answer is: D) $5,800

Explanation:

The doubtful accounts should have a total balance of $6,000, representing 1% of total sales (= $600,000 x 1%).

Since doubtful accounts balance is only $200, you must entry a debit record of $5,800 (so that the total balance of that account is $6,000).