Question

Ayayai Corp. 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 Ayayai Corp. make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment?

a. Bad Debt Expense 8,000; Allowance for Doubtful Accounts8,000
b. Bad Debt Expense 6,000; Allowance for Doubtful Accounts 6,000
c. Bad Debt Expense 6,000; Accounts Receivable 6,000
d. Bad Debt Expense 8,000; Accounts Receivable 8,000

Answer 1

Option (B) is correct.

Step-by-step explanation:

Amount of which adjusting entry required:

= Amount of uncollectible accounts - Balance in Allowance for uncollectible accounts

= (Balance in accounts receivable × Estimated percentage of accounts receivable to be uncollectible) - Balance in Allowance for uncollectible accounts

= ($200,000 × 4%) - $2,000

= $8,000 - $2,000

= $6,000

Therefore, the adjusting entry is as follows:

Bad debt expense A/c Dr. $6,000

To Allowance for uncollectible accounts $6,000

(To record the bad debt expense)