Question

The aging schedule at December 31, 2020, for Gidget Inc. shows the following breakdown of total accounts receivable. Status Amount Not past due $455,000 Past due 1-30 days 108,000 Past due 31-60 days 55,000 Past due over 60 days 14,000 Total $632,000 The company considers the risk of credit losses to be similar within the aging pools and estimates the following credit loss rates by pool: not past due, 0.5%; past due 1-30 days, 1%; past due 31-60 days, 2%; and past due over 60 days, 8%. The Allowance for Doubtful Accounts has a $3,300 credit balance before adjustment. What amount is debited to Bad Debt Expense to adjust the Allowance for Doubtful Accounts to its desired ending balance on December 31, 2020?

Answer 1

Answer:

The amount to be debited to bad debt expense to adjust for allowance for doubtful accounts is $2,275, recorded as follows:

Debit Bad debt expense                               $2,275

Credit Allowance for doubtful accounts      $2,275

(To recognize bad debt expense for the year)

Explanation:

The aging schedule of Gidget Inc. as at December 31, 2020

Status                                 Amount           Credit loss rates   Estimated Bad debt

Not past due                   $455,000                   0.5%                     $2,275

Past due 1 - 30 days        $108,000                      1%                      $1,080

Past due 31 - 60 days       $55,000                      2%                      $1,100

Past due over 60 days      $14,000                      8%                      $1,120

Total                                 $632,000                                               $5,575

Since the balance in allowance for doubtful accounts is $3,300 credit, the bad debt expense would therefore be $2,275 ($5,575 - $3,300).