Question

A company ages its accounts receivables to determine its end of period adjustment for bad debts. At the end of the current year, management estimated that $15,750 of the accounts receivable balance would be uncollectible. Prior to any year-end adjustments, the Allowance for Doubtful Accounts had a debit balance of $375. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense?

Answer 1

The correct choice is option 3

Reason -

Before adjusting entry at the close of the year

Allowance for bad debts debit balance - 375

At year end it is estimated to be - 15750

So in order to nullify the debit balance effect and create the allowance of 15750, the following entry has to be passed:

Bad Debts 16125

Allowance for doubtful accounts 16125

This would ultimately have a net effect with the earlier debit balance and allowance for doubtful debts will show a credit balance of 15750 which is also the requirement as per the question