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Tanning Company analyzes its receivables to estimate bad debt expense. The accounts receivable balance is $318,000...

Tanning Company analyzes its receivables to estimate bad debt expense. The accounts receivable balance is $318,000 and credit sales are $1,000,000. An aging of accounts receivable shows that approximately 7% of the outstanding receivables will be uncollectible. What adjusting entry will Tanning Company make if the Allowance for Doubtful Accounts has a credit balance of $2,600 before adjustment?

a.

Bad Debt Expense 19,660
Allowance for Doubtful Accounts 19,660

b.

Bad Debt Expense 18,660
Allowance for Doubtful Accounts 18,660

c.

Bad Debt Expense 20,660
Allowance for Doubtful Accounts 20,660

d.

Bad Debt Expense 19,160
Allowance for Doubtful Accounts 19,160

Solutions

Expert Solution

The correct answer is option a:

Bad Debt Expense 19,660

Allowance for Doubtful Accounts 19,660

Explanation:

It is given that aging of accounts receivable shows that approximately 7% of the outstanding receivables will be uncollectible.

The accounts receivable balance is $318,000. Therefore, the estimated uncollectible would be as calculated below:

Estimated uncollectible = Accounts receivalbe balance * 7% = $318,000 * 7% = $22,260.

The balance of Allowance for Doubtful Accounts is $2,600 whereas the estimated uncollectible is $22,260. Therefore, the balance of Allowance for Doubtful Accounts is to be increased by $19,660. Therefore to increase the balance of allowance for doubtful accounts, the following entry should be passed:

Bad Debt Expense 19,660

Allowance for Doubtful Accounts 19,660

The balance of allowance for doubtful accounts is credit balance and hence to increase the balance of the same, it gets credited with a corresponding debit effect in profit and loss account through bad debt expense account.

ekkarill92 answered 1 year ago
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