Final answer:
The question pertains to accounting and the estimation of uncollectible accounts receivable using the percent of accounts receivable method. Two scenarios are addressed: one where a credit balance already exists in the Allowance for Doubtful Accounts, and another with a debit balance. The necessary adjusting entries for each scenario are calculated based on the estimated percentage of uncollectible accounts.
Step-by-step explanation:
The subject of the question relates to the percent of accounts receivable method, which is a technique used in accounting to estimate the amount of accounts receivable that will not be collected. According to the scenario, Mazie Supply Co. has total accounts receivable of $72,000 and estimates that 3% will be uncollectible. There are two cases to consider based on the existing balance in the Allowance for Doubtful Accounts:
Credit balance of $1,224: Since there is already a credit in the allowance account, we need to determine the additional amount needed to bring the balance to the correct new estimated total of uncollectible accounts ($72,000 x 3% = $2,160). We calculate the adjustment as $2,160 (desired balance) - $1,224 (existing credit balance) = $936. The adjusting entry would be a debit to Bad Debts Expense for $936 and a credit to Allowance for Doubtful Accounts for $936.
Debit balance of $360: If there's a debit balance, it means the uncollectible amounts were underestimated previously. We need to remove this debit balance and add the new estimate, resulting in an adjusting entry of $72,000 x 3% + $360 = $2,520. The adjusting entry would therefore be a debit to Bad Debts Expense for $2,520 and a credit to Allowance for Doubtful Accounts for $2,520.