Question

During Year 1, Nana Department Store had total sales of $3,000,000, of which 80% were on credit. The beginning balance in Accounts Receivable (on January 1 of Year 1) was $165,000. The beginning balance in the Allowance for Doubtful Accounts (on January 1 of Year 1) was $20,000. The amount of accounts written off as uncollectible during the year was $27,000.

The following aging of Accounts Receivable is for Nana Company at the end of Year 1.

Aging of Accounts Receivable

December 31 of Year 1

                                                                               Less than              31 days to 61 days to                Over

                                                   Overall                  30 days                  60 days                  90 days                90 days

Total    $492,000               $366,000                  $72,000                 $24,000                $30,000

Nana Company has developed the following bad debt information from its own past experience.

                                                Percent

                                                Ultimately

Age of Account                      Uncollectible

Less than 30 days                   2

31 to 60 days                           12

61 to 90 days                           35

Over 90 days                           90

Nana Company uses the aging method to determine its ending Allowance for Doubtful Accounts balance. Which ONE of the following is included in the journal entry necessary at the end of the year to record bad debt expense for the year

		CREDIT to Bad Debt Expense for $58,360
		DEBIT to Accounts Receivable for $51,360
		CREDIT to Allowance for Doubtful Accounts for $58,360
		CREDIT to Accounts Receivable for $58,360
		DEBIT to Allowance for Doubtful Accounts for $51,360
		DEBIT to Bad Debt Expense for $51,360

Answer 1

Allowance for doubtful account estimated bad debts and records it by passign adjusting entry at the year end in which bad debt is debited and allowance for doubtful accoutn is credited.

Allowance for doubtdul account have credit balance

By th end of year the balance in allowance for doubtful account without current estimation is $20,000-$27,000 = -$7,000

bad debt is higher than allowance for doubtful account

Current estimation

less than 30 days	$7,320 ($366,000*2%)
31-60days	$8,640($72,000*12%)
61-90 days	$8,400($24,000*35%)
over 90 days	$27,000($30,000*90%)
Total allowance for doubtful account	$51,360 [$7,320+8,640+8,400+27,000]

The balance for doubtful acoount was $7,000 debit so in order to make it $51,360 credit

We will have to credit allowance for doubtful account by $58,360 [$7,000+$51,360]

Journal entry:

		Debit	Credit
	Bad debt expense	$58,360
	Allowance for doubtful account		$58,360

T Account

		$20,000	Beg. Bal
	$27,000	$58,360	Dec 31
		$51,360	end Bal.[$20,000-$27,000+$58,360]

so correct option is C

CREDIT to Allowance for Doubtful Accounts for $58,360