Question

Percent of accounts receivable method lo p3mazie supply company uses the percent of accounts receivable method. on december 31, it has outstanding accounts receivable of $119,000, and it estimates that 3% will be uncollectible.prepare the year-end adjusting entry to record bad debts expense under the assumption that the allowance for doubtful accounts has:

(a) a $2,023 credit balance before the adjustment.
(b) a $595 debit balance before the adjustment.

Answer 1

To record the bad debts expense with a $595 debit balance in the allowance for doubtful accounts, Mazie Supply Company should debit bad debts expense for $4,165 and credit allowance for doubtful accounts for the same amount, ensuring the allowance reaches the targeted balance calculated using the percent of accounts receivable method.

Step-by-step explanation:

The student has asked how to prepare a year-end adjusting entry to record bad debts expense using the percent of accounts receivable method when the allowance for doubtful accounts has a $595 debit balance before the adjustment, with outstanding accounts receivable totaling $119,000 and an estimated 3% expected to be uncollectible.

To calculate the required adjustment, one would first calculate the target balance for the allowance by taking 3% of the $119,000 accounts receivable, which amounts to $3,570 ($119,000 x 0.03). Since there's already a debit balance of $595 in the allowance account, the company needs to credit the allowance for doubtful accounts by the total sum of the target balance and the existing debit balance to arrive at the correct balance. This means the adjusting entry would be a debit to the bad debts expense for $4,165 ($3,570 + $595) and a credit to the allowance for doubtful accounts for $4,165.