Question

Leo Co. uses the allowance method to account for bad debts. At the end of the year, Leo Co.'s accounts receivable balance is $25,000; allowance for doubtful accounts balance of $100 (debit balance); and sales of $500,000. Based on history, Leo estimates that bad debts will be 2% of accounts receivable. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of: Multiple choice question.

Answer 1

Answer: $400

Explanation:

A bad debt expense will be recognized by a company when the company cannot collect its receivable due to the fact that a customer cannot pay back their debt and fulfill their obligation.

Therefore, the estimated bad debts will be computed below:

= ($25,000 × 2% - $100)

= $500 - $100

= $400

Then, the journal entry to record the estimated bad debt expense will be:

Debit: Bad debt expense A/c $400

Credit: Allowance for doubtful debts $400