Question

An analysis of a company's past credit sales history of bad debts indicates that $5,000 are estimated to be uncollectible. If Allowance for Doubtful Accounts has a $900 credit balance, the adjustment to record bad debts for the period will require a

a. credit to Allowance for Doubtful Accounts for $5,000.
b. debit to Bad Debt Expense for $4,100.
c. debit to Allowance for Doubtful Accounts for $4,100.
d. credit to Bad Debt Expense for $5,000.

Answer 1

A debit to Bad Debt Expense for $4,100 is required to adjust the Allowance for Doubtful Accounts to the new estimated uncollectible amount of $5,000, taking into account the existing $900 credit balance.

Step-by-step explanation:

The adjustment to record bad debts for the period, considering the existing $900 credit balance in the Allowance for Doubtful Accounts and $5,000 estimated to be uncollectible, will require a debit to Bad Debt Expense for $4,100.

To record the bad debt, you would create a journal entry that includes a debit to Bad Debt Expense for the amount needed to adjust the allowance to the new estimated total of uncollectible accounts. Since the Allowance for Doubtful Accounts already has a $900 credit balance, we subtract that from the new estimate of $5,000, resulting in the $4,100 debit to Bad Debt Expense. The corresponding credit would go to the Allowance for Doubtful Accounts to bring its balance to the $5,000 estimate.

With this adjustment, the Allowance for Doubtful Accounts will have a balance that reflects the estimated bad debts, thus aligning with the matching principle in accounting, which states that expenses should be recorded in the period they are incurred.