Final answer:
The adjusting entry for the Allowance for Doubtful Accounts should be a credit of $26,000, which is calculated by taking 1% of the sales ($27,500) minus the existing credit balance in the allowance account ($1,500).
Step-by-step explanation:
The student's question regards the calculation of the adjusting entry for the Allowance for Doubtful Accounts at the end of the accounting period for Chen Company.
With an original Account Receivable balance of $800,000 debit and Allowance for Doubtful Accounts at a $1,500 credit, combined with sales of $2,750,000 during the year, the company estimates that 1% of sales will be uncollectible. Therefore, the adjusting entry includes a credit to the allowance account for 1% of total sales, which is $27,500. When we include the existing credit balance in the Allowance for Doubtful Accounts, the entry should be adjusted to:
New Allowance = 1% of Sales - Existing Credit Balance
New Allowance = $27,500 (1% of $2,750,000) - $1,500
New Allowance = $27,500 - $1,500
New Allowance = $26,000
Therefore, the correct adjusting entry is:
- Debit Bad Debt Expense $26,000
- Credit Allowance for Doubtful Accounts $26,000