Question

Warner company's year-end unadjusted trial balance shows accounts receivable of $103,000, allowance for doubtful accounts of $640 (credit), and sales of $320,000. Uncollectibles are estimated to be 1.50% of accounts receivable. Prepare the December 31 year-end adjusting entry for uncollectibles. What amount would have been used in the year-end adjusting entry if the allowance account had a year-end unadjusted debit balance of $500?

Answer 1

To prepare the year-end adjusting entry for uncollectibles, Warner Company needs to adjust the allowance for doubtful accounts by debiting Bad Debt Expense and crediting Allowance for Doubtful Accounts. The adjustment amount is $905 with a credit balance and $2,045 with a debit balance in the allowance account.

Step-by-step explanation:

Adjusting Entry for Uncollectible Accounts

To prepare the December 31 year-end adjusting entry for uncollectibles for Warner Company, we first need to calculate the estimated uncollectibles. We do this by taking 1.50% of the accounts receivable, which is $103,000. Therefore, the uncollectible amount is 1.50% * $103,000 = $1,545. Since there is already a credit balance in the allowance for doubtful accounts of $640, the adjusting entry would need to increase this allowance to match the estimated uncollectibles.

The adjusting entry is:

Debit Bad Debt Expense for $905 ($1,545 - $640)

Credit Allowance for Doubtful Accounts for $905

If the allowance account had a year-end unadjusted debit balance of $500, the required adjustment would increase. We would need to set the allowance for doubtful accounts to the estimated amount of $1,545, which means the adjusting entry would be:

Debit Bad Debt Expense for $2,045 ($1,545 + $500)

Credit Allowance for Doubtful Accounts for $2,045

This adjustment ensures that the allowance for doubtful accounts reflects the estimated uncollectibles at the year-end.