Question

Awesome Cookie Company had total credit sales for the past year of $800,000. As of year-end, but before estimating bad debts, the company had a $70,000 debit balance in accounts receivable and a $600 debit balance in the Allowance for Uncollectible Accounts. The company provided the following aging of accounts receivable schedule and estimates of the bad debts percentages:

Age	Amount	Bad debt Percentage
1-30 days	38,500	10%
31-60 days	21,000	25%
61-90 days	6,300	40%
Over 90 days	4,200	80%

Which journal entry will the company need to make to estimate bad debts using the aging method?

Answer 1

• When using Allowance Method with Aging of Receivables, The Adjusted balance of Allowance account (after adjusting bad debt expense) MUST be equal to the amount of Accounts receivables estimated to be Uncollectible.
• Working: To calculate estimated Uncollectible amount (or Adjusted Credit Balance of Allowance for Uncollectible account

Age	Amount	Bad debt	Amount estimated to
		Percentage	be Uncollectible
1-30 days	$       38,500.00	10%	$              3,850.00
31-60 days	$       21,000.00	25%	$              5,250.00
61-90 days	$         6,300.00	40%	$              2,520.00
Over 90 days	$         4,200.00	80%	$              3,360.00
TOTAL	70000	TOTAL estimated Uncollectible amount	$            14,980.00

• Above working shows that Estimated uncollectible amount = $ 14,980. Hence, after adjustment, Allowance for Uncollectible account’s balance must be $ 14,980 Credit.
• Unadjusted balance of Allowance for Uncollectible account given in question = $ 600 Debit.
• Therefore, to make $ 600 Debit become $ 14,980 Credit balance, the Allowance account needs to be CREDITED with $ 15,580 [$ 600 for clearing debit balance and $ 14980 for making balance equal to uncollectible amount]
• The Bad Debt expense will be debited by the amount by which Allowance account is credited.
• Adjusting Journal entry would be:

Accounts title	Debit	Credit
Bad Debt Expense or Uncollectible Expense	$            15,580.00
Allowance for Uncollectible Accounts		$        15,580.00