To adjust the allowance for doubtful accounts from a $990 debit balance to a $3,270 credit balance, estimated at 3% of $109,000 in outstanding receivables, a journal entry is required with a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts totaling $4,260.
The question is related to accounting for uncollectible accounts using the allowance method.
A company has $109,000 in outstanding accounts receivable and estimates that 3% of these receivables will be uncollectible.
The current balance in the allowance for doubtful accounts is a $990 debit.
To record the adjustment to the allowance account, we first need to calculate the desired ending balance in the allowance account, which is 3% of the outstanding receivables:
$109,000 (outstanding receivables) × 3% (estimated uncollectible) = $3,270 (desired ending balance).
Since the current balance in the allowance account is a $990 debit, we need to bring it to the desired credit balance of $3,270.
This requires a two-step process:
Remove the current debit balance of $990 by crediting the account (reversing the debit balance).
Add to that the amount needed to reach the desired $3,270 credit balance.
The total credit adjustment will be the sum of these two amounts:
$990 (to reverse the current debit balance) + $3,270 (to reach the desired balance) = $4,260.
The journal entry to record the adjustment will be:
Debit Bad Debts Expense for $4,260
Credit Allowance for Doubtful Accounts for $4,260
This adjustment records the estimated bad debts expense for the period and properly states the allowance for doubtful accounts on the balance sheet.