Question

Tanning Company analyzes its receivables to estimate bad debt expense. The accounts receivable balance is $320,000 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 the Allowance for Doubtful Accounts has a credit balance of $2,600 before adjustment?

Select the correct answer.

A Bad Debt Expense$22,500 Accounts Receivable$22,500

B Bad Debt Expense$23,000 Allowance for Doubtful Accounts$23,000

C Bad Debt Expense$24,000 Allowance for Doubtful Accounts$24,000

D Bad Debt Expense$22,000 Accounts Receivable$22,000

Answer 1

Solution:

Allowance for Doubtful Account Method

Under Allowance for Doubtful Debt method, the company uses an estimate for allowance for doubtful debt by using specified method and accordingly book Bad Debt Expenses for the period.

Allowance method creates bad debts expenses before the company knows specifically which customers will not pay on the basis of prior history and prior experience.

On the basis of prior years’ experience company can reasonably estimated what percentage of accounts receivable measure will not be collected.

Estimated Uncollected Accounts Expense is adjusted with the balance in the account of Allowance for Doubtful Account.

The credit balance amount in the Allowance for Doubtful Account is given in the question $2,600

Estimated Uncollectable amount = Accounts Receivable outstanding $320,000 * 8% = $25,600

Bad Debt Expense recorded = $25,600 – 2,600 = $23,000

It means the amount of Allowance for Doubtful Account is adjusted to $25,600 (23,000 + $2,600)

Following journal entry to be recorded

Bad Debt Expense $23,000

Allowance for Doubtful Accounts $23,000

Hence, the correct option is B. Bad Debt Expense$23,000 Allowance for Doubtful Accounts$23,000