Question

Providing for doubtful accounts at the end of the current year, the accounts receivable account has a debit balance of $2,700,000 and sales for the year total $32,400,000. Bad debt expense is estimated at ½ of 1% of sales. The allowance account before adjustment has a debit balance of $27,100. Determine the amount of the adjusting entry to provide for doubtful accounts under each of the assumptions (a through d) listed above.

a) $108,000
b) $192,000
c) $239,000
d) $270,000

Answer 1

To calculate the adjusting entry for doubtful accounts, estimate bad debt expense at 0.5% of sales, then add any existing debit balance in the allowance account.

In this case, the bad debt expense is $162,000, and the total adjustment needed is $189,100, with the closest provided option being $192,000.

Step-by-step explanation:

To determine the adjusting entry for doubtful accounts, we must first calculate the estimated amount of bad debt expense. Bad debt expense is estimated at 0.5% (or ½ of 1%) of sales. With sales totaling $32,400,000, the estimated bad debt expense would be $32,400,000 x 0.005 = $162,000. Since the allowance account has a debit balance of $27,100 before adjustment, we must add this amount to the estimated bad debt expense to determine the total adjustment needed.

The total amount of the adjusting entry will be $162,000 (estimated bad debt expense) + $27,100 (existing debit balance in allowance account) = $189,100.

Out of the given options, the amount closest to our calculated adjustment is:

• $192,000

Therefore, the adjusting entry under the assumption closest to the calculated value is $192,000.