Question

A company uses the percent of receivables method to determine its bad debts expense. At the end of the current year, the company's unadjusted trial balance reported the following selected amounts: Accounts receivable $ 375,000 debit Allowance for uncollectible accounts 500 credit Net Sales 800,000 credit
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? A) Debit Bad Debts Expense $2,130; credit Allowance for Doubtful Accounts $2,130. B) Debit Bad Debts Expense $2,630; credit Allowance for Doubtful Accounts $2,630. C) Debit Bad Debts Expense $4,300; credit Allowance for Doubtful Accounts $4,300. D) Debit Bad Debts Expense $4.800; credit Allowance for Doubtful Accounts $4,800. E) Debit Bad Debts Expense $5,300; credit Allowance for Doubtful Accounts $5,300.

Answer 1

Answer:

C) Debit Bad Debts Expense $4,300; credit Allowance for Doubtful Accounts $4,300

Explanation:

accounts receivable $375,000

allowance for uncollectible accounts $500

net sales $800,000, all on credit

estimated bad debts = net credit sales x 0.6% = $800,000 x 0.6% = $4,800

since the balance of the allowance account is just $500, it must e adjusted to include the remaining estimated bad debt = $4,800 - $500 = $4,300

the journal entry should be:

December 31, adjustment of bad debt expense

Dr Bad debt expense 4,300

    Cr Allowance for uncollectible accounts 4,300

Allowance for uncollectible accounts is a contra asset account that reduces the value of accounts receivable and has a credit balance.