Question

All sales are made on credit. Based on past experience, the company estimates 0.6% of net credit sales 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:

Bad Debts Expense                             Debit    $4,800;

Allowance for Doubtful Accounts       Credit   $4,800

Explanation:

Given,

Net sales = $800,000 (Credit)

Accounts receivable = $355,000

Allowance for uncollectible accounts = $500 (debit balance)

Uncollectible = 0.6% of net credit sales

Since the question is to record the current year's estimated bad debts expense, therefore, the bad debts expense is calculated multiplying the net credit sales by the percentage of net credit sales to be uncollectible.

Bad debts expense = $800,000 x 0.6% = $4,800

The journal should be -

Bad Debts Expense Debit $4,800;

Allowance for Doubtful Accounts Credit $4,800

(Allowance for doubtful accounts is credit because last year, the company had a debit balance of uncollectible accounts that has to be adjusted this year)