Question

Winstead & Company has Accounts receivable of $120,000 and a Debit balance of Allowance for Doubtful Accounts $1,000 in the Allowance for Doubtful Accounts. and .The firm estimates that two percent of the current accounts and five percent of the past due account will prove to be uncollectible.

The adjusting entry to provide for the bad debts expenses under the aging method should be for what amount?

Answer 1

• Accounts receivables balance = $ 120,000
• Uncollectable amount expected = 2% + 5% = 7% of account receivables
• Under aging method, the Allowance for Doubtful account adjusted CREDIT balance must be equal to the amount estimated to be uncollectiable.
• In this case, amount estimated to be uncollectible= 120000 x 7% = $ 8,400
• Now, Allowance for Doubtful Accounts balance must have to be maintained at $ 8,400 credit.
• Given that Allowance account already has a DEBIT balance of $ 1000.

To make the balance go from $ 1000 debit to $ 8,400 credit balance, the account need to be credited with $ 9400 [$1000 for clearing out debit balance and $8400 for making the adjusted balance equal to uncollectible amount]

Hence, Allowance for Doubtful account will be credited by $ 9400.

• Also, when Allowance account will be credited, Bad Debt Expense account will be debited.
• Adjusting Entry would be:

Bad Debt Expense a/c debited by $ 9400, and
Allowance for Doubtful account credited by $ 9400