Question

Tanning Company analyzes its receivables to estimate bad debt expense. The accounts receivable balance is $374,000 and credit sales are $1,000,000. An aging of accounts receivable shows that approximately 4% of the outstanding receivables will be uncollectible. What adjusting entry will Tanning Company make if the Allowance for Doubtful Accounts has a credit balance of $3,000 before adjustment

Answer 1

Dr Bad debt expense $11,960

Cr Allowance for doubtful account $11,960

Step-by-step explanation:

Aging of accounts = 4% of Accounts receivable

$374,000 × 4% = $14,960 expected allowance

Current balance ($3,000 credit)

Adjustment $11,960

When we calculate allowance using aging of percent on receivables, the difference between the expected and the current balance should be adjusted

It therefore means that ;

the balance should be $14,960 credit ,

while we also have $3,000 credit.

The allowance should be increased by the difference so that it can be balanced hence adjustment equals the expected balance.