Question

At each calendar year-end, Mazie Supply Co. uses the percent of accounts receivable method to estimate bad debts. On December 31, 2017, it has outstanding accounts receivable of $60,000, and it estimates that 4% will be uncollectible. Prepare the adjusting entry to record bad debts expense for year 2017 under the assumption that the Allowance for Doubtful Accounts has: (a) a $1,020 credit balance before the adjustment. (b) a $300 debit balance before the adjustment.

Answer 1

• All working forms part of the answer
• Steps to record Bad Debt expense when following Allowance method based on % of accounts receivable uncollectible.

Step1: Calculate Amount of estimated accounts receivables that are uncollectible. The adjusted balance of Allowance for Doubtful Account (after recording Bad Debt Expense) must be made equal to this amount.

Step 2: Determine Unadjusted balance in Allowance account.

Step 3: In the adjusting entry, credit Allowance by an amount that will make Allowance account balance (in Step 2) equal to the required adjusted balance (in Step 1). Debit Bad Debt expense by the same amount.

• Requirement ‘a’

A	Balance of Accounts receivables	$            60,000.00
B	% estimated to uncollectible	4%
C = A x B	Adjusted balance of Allowance account required [Step 1]	$              2,400.00 Credit
D	Unadjusted balance of Allowance account [Step 2]	$              1,020.00 Credit
E = C - D	Amount of Bad Debt Expense [Step 3]	$              1,380.00 [2400 – 1020]

Date	Accounts title	Debit	Credit
31-Dec	Bad Debt Expense	$              1,380.00
	Allowance for Doubtful Accounts		$                        1,380.00
	(Bad Debt expense recorded)

• Requirement ‘b’

A	Balance of Accounts receivables	$            60,000.00
B	% estimated to uncollectible	4%
C = A x B	Adjusted balance of Allowance account required [Step 1]	$              2,400.00 Credit
D	Unadjusted balance of Allowance account [Step 2]	$                  300.00 Debit
E = C + D	Amount of Bad Debt Expense [Step 3]	$              2,700.00 [300 for debit and 2400 for credit]

Date	Accounts title	Debit	Credit
31-Dec	Bad Debt Expense	$              2,700.00
	Allowance for Doubtful Accounts		$                        2,700.00
	(Bad Debt expense recorded)