Question

Laurs Company uses the percentage of receivables method for recording bad debts expense. The Accounts Receivable balance is $200,000 and credit sales are $1,000,000. Management estimates that 4% of accounts receivable will be uncollectible. What adjusting entry will Manning Company make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment?a. Bad Debts Expense 10,000Allowance for Doubtful Accounts 10,000b. Bad Debts Expense 8,000Allowance for Doubtful Accounts 8,000c. Bad Debts Expense 6,000Allowance for Doubtful Accounts 6,000d. Bad Debts Expense 12,000Accounts Receivable 12,000

Answer 1

Answer:

c. Bad Debts Expense 6,000 ; Allowance for Doubtful Accounts 6,000

Explanation:

Before passing the adjusting entry, first we have to determine the adjusted amount which is shown below:

= Uncollectible balance - credit balance of Allowance for Doubtful Accounts

where,

Uncollectible balance = Accounts receivable × uncollectible percentage

                                    = $200,000 × 4%

                                    = $8,000

And, the credit balance of Allowance for Doubtful Accounts is $2,000

Now put these values to the above formula

So, the value would be equal to

= $8,000 - $2,000

= $6,000

Now the adjusting entry would be

Bad debt expense A/c Dr  $6,000

  To Allowance for doubtful debts  $6,000

(Being estimated bad debts is recorded)