Question

Assume ayayai uses the allowance method to account for uncollectible accounts. if allowance for doubtful accounts has a balance of $880 and ayayai concludes bad debts are expected to be 10% of accounts receivable, what will ayayai record as bad debt expense?

Answer 1

To record bad debt expense, Ayayai must adjust the Allowance for Doubtful Accounts to reflect 10% of accounts receivable as uncollectible. If the accounts receivable is $10,000, the new estimate is $1,000 of bad debts. Since the allowance has a $880 credit balance, Ayayai records an additional $120 as a bad debt expense.

Step-by-step explanation:

The question asks about recording bad debt expense using the allowance method in accounting. When Ayayai concludes that bad debts are expected to be 10% of accounts receivable, they must adjust the Allowance for Doubtful Accounts to reflect this new estimate. The entry to record the bad debt expense depends on the existing balance in the allowance account and the new estimated amount.

First, determine the total estimated uncollectible amount by calculating 10% of the accounts receivable. For example, if accounts receivable is $10,000, then 10% is $1,000. Then, compare this with the existing balance in the Allowance for Doubtful Accounts.

If the existing balance is $880 (credit), and the new estimate is $1,000, Ayayai would need to record an additional $120 ($1,000 - $880) as bad debt expense to adjust the allowance to the correct amount. The journal entry would be a debit to Bad Debt Expense for $120 and a credit to Allowance for Doubtful Accounts for $120.