Question

Using the income statement approach, in the adjustment entry, what is the debit to the bad debt expense account given the following amounts?

Bad debt at a percentage of sales	2%
Bad debt as a percentage of A/R	5%
Sales	800,000
A/R	125,000
Balance of bad debt expense before adjustment (debit balance)	9,840

HINT

Bad debt expense adjustment is done at the end of the year (or quarter or month) depending on when companies pull together financial statements.

The Income statement approach estimates the ending balance of bad debt expense based on Sales for the year (in this case) and a bad debt as a percentage of sales amount. This percent is determined by companies based on history or projected information.

Set up a T-Account for Bad Debt Expense, beginning balance is a debit of 9,840 (given). Ending balance is computed as Sales times bad debt percentage of sales. Compute the adjusting entry amount.

Debit Bad debt expense ???-adjustment amount

Credit Allowance for doubtful accounts ??? -adjustment amount

Answer 1

Solution:
CALCULATION OF ESTIMATED UNCOLLECTABLE ON THE BASIS OF % OF SALES
	Net Sales	$                800,000
	Estimated uncollectable	2%
	Estimated amount of uncollectable	$                  16,000
	($ 800,000 X 2%)
	Bad debts expenses debited in journal entry is with $ 16,000
	Answer = Debited to Bad Debt Expenses = $ 16,000
Journal Entries
Date	Account Title and explanation	Debit	Credit
-------	Bad Debt Expenses	$                  16,000
	Allowance for Doubtful Accounts		$                                                        16,000
	(To record the bad debt Expenses)
	Bad Debt Expenses
	Beginning Balance	$                     9,840
	C/Y Expenses	$                  16,000
	Ending Balance	$                  25,840		$                       -