Question

Nichols Company uses the percentage of receivables method for recording bad debts expense. The month-end accounts receivable balance is $250,000 and credit sales during the month were $1,000,000. Management estimates that 4% of accounts receivable will be uncollectible. The Allowance for Doubtful Accounts has a credit balance of $2,500 before adjustment. The adjusting entry that Nichols must make includes: a. a credit to the allowance for $7,500. b. a credit to the allowance for $30,000. c. a debit to bad debt expense for $10,000. d. a debit to bad debt expense for $40,000.

Answer 1

Answer: a. a credit to the allowance for $7,500

Step-by-step explanation:

Estimated Bad Debt = Balance on Account receivable x bad Debt loss rate = $250,000 x 4% = $10,000

Allowance for doubtful accounts with a credit balance of $2,500

Allowance for Bad debts expense =Estimated Bad Debt - Credit balance Allowance for doubtful accounts = $10,000 - $2,500 = $7,500

Account titles and explanation Debit Credit

Bad Debt Expense $7,500

Allowance for Doubtful Accounts $7,500