Question

Tanning Company analyzes its receivables to estimate bad debt expense. The accounts receivable balance is $366,000 and credit sales are $1,000,000. An aging of accounts receivable shows that approximately 8% of the outstanding receivables will be uncollectible. What adjusting entry will Tanning Company make if Allowance for Doubtful Accounts has a credit balance of $2,400 before adjustment? a. Bad Debt Expense $25,880 Allowance for Doubtful Accounts $25,880 b. Bad Debt Expense $26,880 Allowance for Doubtful Accounts $26,880 c. Bad Debt Expense $27,880 Allowance for Doubtful Accounts $27,880 d. Bad Debt Expense $26,380 Allowance for Doubtful Accounts $26,380

Answer 1

b. Bad Debt Expense $26,880 Allowance for Doubtful Accounts $26,880

Step-by-step explanation:

The journal entry to record the transaction is as follows:

Debit Bad Debt Expense $26,880

Credit Allowance for Doubtful Accounts $26,880

Calculation: As the allowance of 8% will be uncollected because of the outstanding receivables, the total uncollectible is = $366,000 × 8% = $29,280.

As allowance for Doubtful Accounts has a credit balance of $2,400 before adjustment, which is a contra-entry and also a positive balance, we have to deduct this balance from $29,280 to determine the bad debt expense.

Therefore, $29,280 - $2,400 = $26,880.

Therefore, option B is correct.