Answer:
Debit : Bad Debts = $16,370
Credit : Allowance for doubtful debts = $16,370
Explanation:
The question states that bad debts are expected to be 5% of the accounts receivables. This means that it is: $327,400 x 5% = $16,370.
An account for allowance for doubtful debts is a contra account created, predicting that certain debtors will not be able to pay for the goods and services they purchased. The 5% may be based on historical experiences. Doubtful debts aren’t officially uncollectible, it is simply a prediction, but bad debts are, where you have officially written off a certain accounts receivable as uncollectible.
An allowance for doubtful debts is recorded in the balance sheet, directly under accounts receivables. Bad debts are recorded as an expense in the income statement.
The initial entry for allowance for doubtful debts is incorrect, hence it would have to be corrected before the new amount can be recorded. Correction:
Debit : Allowance for doubtful debts = $7900
Credit : Bad debts = $7900
The accounts will be cancelled off and the new entry can be recorded...
Debit : Bad Debts = $16,370
Credit : Allowance for doubtful debts = $16,370
When the amount is officially declared uncollectible, the allowance for doubtful debts account will be debited and the accounts receivables account will be credited.
