Question

Assume the following unadjusted account balances at the end of the accounting period for Emmie Company: Accounts Receivable, $300,000; Allowance for Doubtful Accounts, $4,200 (debit balance); and Net sales, $3,600,000. If Emmie’s past experience indicates credit losses of 1% of net sales, the adjusting entry to estimate doubtful accounts is: Select one: A. Bad Debts Expense 36,000 Allowance for Doubtful Accounts 36,000 B. Bad Debts Expense 36,000 Accounts Receivable 36,000 C. Bad Debts Expense 31,800 Allowance for Doubtful Accounts 31,800 D. Bad Debts Expense 40,200 Allowance for Doubtful Accounts 40,200

Answer 1

Answer:

Option (A) is correct.

Explanation:

Given that,

Accounts Receivable = $300,000

Allowance for Doubtful Accounts = $4,200 (debit balance)

Net sales = $3,600,000

The Adjusting journal entry is as follows:

Bad Debts Expense A/c Dr. $36,000

           To Allowance for Doubtful Accounts   $36,000

(To record the estimate doubtful accounts)

Working notes:

Bad Debts Expense = 1 percent of net sales

                                 = 0.01 × $3,600,000

                                 = $36,000