Question

A company has $100,000 in outstanding accounts receivable and it uses the allowance method to account for uncollectible accounts. Experience suggests that 5% of outstanding receivables are uncollectible. The current balance (before adjustments) in the allowance for doubtful accounts is a(n) $900 credit.

The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for $_______.

Answer 1

The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for $5,100.

Step-by-step explanation:

The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for $5,100.

For the allowance method, the adjustment is made to the allowance for doubtful accounts based on an estimate of uncollectible receivables. In this case, experience suggests that 5% of outstanding receivables are uncollectible, which is $5,000 ($100,000 * 5%). The current balance in the allowance for doubtful accounts is a $900 credit, so in order to increase the allowance to $5,000, a debit of $5,100 ($5,000 - $900) needs to be made to the Bad Debts Expense account.

Answer 2

$4,100

Step-by-step explanation:

When a company makes sales on account, debit accounts receivable and credit sales. Based on assessment, some or all of the receivables may be uncollectible.

To account for this, debit bad debit expense and credit allowance for doubtful debt. Should the debt become uncollectible (i.e go bad), debit allowance for doubtful debt and credit accounts receivable.

Where a debit that had previously been determined to have gone bad gets settled, debit cash and credit bad debt expense.

Amount of allowance for doubtful debt

= 5% * $100,000

= $5,000

Since the account already has a credit balance of $900, additional adjustment required

= $5,000 - $900

= $4,100

Entries required are

Debit Bad debt expense $4,100

Credit Allowance for doubtful debt $4,100