Question

The unadjusted trial balance at year-end for a company that uses the percent of receivables method to determine its bad debts expense reports the following selected amounts:

Accounts receivable $441,000 Debit
Allowance for Doubtful Accounts 1,310 Debit
Net Sales 2,160,000 Credit
All sales are made on credit.
Based on past experience, the company estimates 2.5% of ending accounts receivable will be uncollectible.
What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense?
a. Debit Bad Debts Expense $11,025; credit Allowance for Doubtful Accounts $11,025.
b. Debit Bad Debts Expense $9,715; credit Allowance for Doubtful Accounts $9,715.
c. Debit Bad Debts Expense $12,335; credit Allowance for Doubtful Accounts $12,335.
d. Debit Bad Debts Expense $5,400; credit Allowance for Doubtful Accounts $5,400.
e. Debit Bad Debts Expense $15,400; credit Allowance for Doubtful Accounts $15,400.

Answer 1

The adjusting entry at the end of the year is option c.

Debit Bad Debts Expense $12,335;

credit Allowance for Doubtful Accounts $12,335

Step-by-step explanation:

Bad debt : The amount which is not received by the customer for good supplied by the company is treated as a bad debt.

In the given question,

The 2.5% of ending accounts receivable will be uncollectible so, the allowance would be equals to

= 2.5 % of Accounts receivable

= 2.5 % × $441,000

= $110,25

Now add the allowance for doubtful accounts to the allowance which is calculated above.

So,

= $110,25 + 1,310

= $12,335

The estimated bad debts expense is $12,335

Hence, the adjusting entry at the end of the year is option c.

Debit Bad Debts Expense $12,335;

credit Allowance for Doubtful Accounts $12,335