Question

Allowance Method of Accounting for Bad Debts— Comparison of the Two Approaches. Kandel Company had the following data available for 2014 (before making any adjustments):
Accounts receivable, 12/31/14 $320,100 (Dr.)
Allowance for doubtful accounts 2,600 (Cr.)
Net credit sales, 2014 834000 (Cr.)
Required:1. Prepare the journal entry to recognize bad debts under the following assumptions: (a) bad debts expense is expected to be 2% of net credit sales for the year and (b) Kandel expects it will not be able to collect 6% of the balance in accounts receivable at year-end.2. Assume instead that the balance in the allowance account is a $2,600 debit. How will this affect your answers to part (1)?

Answer 1

Answer:

(A) bad debt expense 16,680 debit

  allowance for doubtful accounts 16,680 credit

(B) bad debt expense 16,606 debit

  allowance for doubtful accounts  16,606 credit

2.-

(A) will not change, we are adjusting for the "% of sales regardless of the beginning balance

(B) bad debt expense 16,806 debit

  allowance for doubtful accounts  21,806 credit

Explanation:

(A)

bad debt expense expected as 2% of credit sales

834,000 x 2% = 16,680

we are recognizing the bad debt expense, so we directly record for this amount

(B)

uncolectible 6% of AR

ending baaance we expect this as uncollectible amount

ending balance 6% of 320,100 19,206

current balance allowance       (2,600) credit

adjustment                                16,606

2.- B

ending balance 6% of 320,100 19,206

+ current balance allowance       2,600 debit

adjustment                                21,806