Question

Phantom Inc. has an unadjusted debit balance of $5,250 in its Allowance for Doubtful Accounts. The company has experienced bad debt losses of 2% of credit sales in prior periods. Phantom reported net credit sales of $2,250,000 for the current period. To record the potential bad debts, Phantom would debit:

A. Allowance for Doubtful Accounts for $45,000.
B. Allowance for Doubtful Accounts for $50,250.
C. Bad Debt Expense for $50,250.
D. Bad Debt Expense for $45,000.

Answer 1

To record potential bad debts, Phantom Inc. would debit Bad Debt Expense for $45,000, which represents 2% of the company's net credit sales for the period after adjusting for the existing debit balance in the Allowance for Doubtful Accounts.

Step-by-step explanation:

The student is asking how to record potential bad debts for Phantom Inc., given an existing debit balance in the Allowance for Doubtful Accounts and a percentage of credit sales that is expected to be uncollectible. To solve this, we need to calculate 2% of Phantom's net credit sales for the current period and adjust the existing allowance account accordingly. First, calculate the bad debt expense: 2% of $2,250,000 in net credit sales is $45,000. Since there is already a debit balance of $5,250 in the Allowance for Doubtful Accounts, we only need to adjust this account to reflect the total bad debt expense for the period. We would debit Bad Debt Expense for $45,000 to record the current period's expense and credit Allowance for Doubtful Accounts for the same amount to adjust its balance to the desired amount reflecting the estimated bad debts. In summary, the correct journal entry would be:
Debit Bad Debt Expense for $45,000
Credit Allowance for Doubtful Accounts for $45,000

Therefore, the correct answer is:
D. Bad Debt Expense for $45,000.