Question

Williams Corporation uses the balance sheet approach in estimating uncollectibles. At the end of the year, Williams Corporation estimates that 2% of its accounts receivable of $1,000,000 will be uncollectible. Allowance for Doubtful Accounts has a debit balance of $1,000 before adjustment. What is the amount of the adjusting entry?

	A.	$21,000
	B.	$22,000
	C.	$20,000
	D.	$19,000

Answer 1

Solution:

Allowance for Doubtful Account Method

Under Allowance for Doubtful Debt method, the company uses an estimate for allowance for doubtful debt by using specified method and accordingly book Bad Debt Expenses for the period.

Allowance method creates bad debts expenses before the company knows specifically which customers will not pay on the basis of prior history and prior experience.

There are two approaches for recording of Bad Debt Expense under allowance for doubtful account method.

(i) Balance Sheet Approved or Accounts Receivable Aging Method -- Under this, on the basis of prior years’ experience company can reasonably estimated what percentage of accounts receivable measure will not be collected.

Here in the question,

Estimated Uncollectible Amount for the period = 2% of Accounts Receivable 1,000,000 = $20,000

Allowance for Doubtful Accounts already has Debit Balance of $1,000, so we need to adjust this debit balance to $20,000 credit balance.

Adjustment Entry is to be passed as follows:

Debit: Bad Debt Expense (20,000 + 1000) $21,000

Credit: Allowance for Doubtful Account $21,000

So the amount of adjustment entry is $21,000

Hence, the correct option is A. $21,000

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