Question

At the end of the current year, Accounts Receivable has a balance of $400,000; Allowance for Doubtful Accounts has a debit balance of $3,500; and sales for the year total $1,800,000. Bad debt expense is estimated at 1/4 of 1% of sales. a. Determine the amount of the adjusting entry for uncollectible accounts.

Answer 1

8000$

Explanation:

To determine the amount of the adjusting entry for uncollectible accounts, you can follow these steps:

Calculate the estimated bad debt expense based on the given information:

Bad Debt Expense = (Sales * Estimated Bad Debt Percentage)

Bad Debt Expense = ($1,800,000 * 0.0025) [1/4 of 1% is equivalent to 0.0025]

Bad Debt Expense = $4,500

Determine the necessary adjustment to the Allowance for Doubtful Accounts (AFDA) to bring it to the desired balance. The desired balance is the estimated bad debt expense.

Adjustment to AFDA = Estimated Bad Debt Expense - Existing Debit Balance in AFDA

Adjustment to AFDA = $4,500 - (-$3,500) [Note that a debit balance in AFDA is subtracted]

Adjustment to AFDA = $4,500 + $3,500

Adjustment to AFDA = $8,000

Now, make the adjusting journal entry. Since you need to increase the Allowance for Doubtful Accounts, which has a debit balance, you'll credit it to increase it.

Adjusting Journal Entry:

Debit: Bad Debt Expense $4,500

Credit: Allowance for Doubtful Accounts $8,000

This entry recognizes the estimated bad debt expense and increases the allowance to cover potential uncollectible accounts. After making this adjusting entry, the Allowance for Doubtful Accounts will have a credit balance of $8,000, which is the estimated amount needed to cover the expected uncollectible accounts.