Megan's Products is undecided about which base to use in estimating uncollectible accounts. On December 31 2016 the balance in Accounts Receivable was $308000 and net credit sales amounted to $2700000 during 2016. An aging analysis of the accounts receivable indicated that $31000 in accounts are expected to be uncollectible. Past experience has shown that about 1% of net credit sales eventually are uncollectible.
Instructions
Prepare the adjusting entries to record estimated bad debt expense using the (1) percentage of sales basis and (2) the percentage of receivables basis under each of the following independent assumptions:
(a) Allowance for Doubtful Accounts has a credit balance of $2300 before adjustment.
(b) Allowance for Doubtful Accounts has a debit balance of $370 before adjustment.

Question

Sairik Das - The Knowledge Hub · Accepted Answer

Final Answer :(1) Percentage-of-sales basis:The following adjusting entry would be the same regardless of the balance in the Allowance for Doubtful Accounts.  Bad Debt Expense  ( $ 2 , 700 , 000 × . 01 )   27 , 000  Allowance for Doubtful Accounts. 27 , 000 \begin{array}{lrr}   	ext { Bad Debt Expense   (\$ 2,700,000 	imes .01)  }  & 27,000\  	ext { Allowance for Doubtful Accounts.}  & & 27,000\\end{array}  Bad Debt Expense  ( $2 , 700 , 000 × .01 )    Allowance for Doubtful Accounts. ​ 27 , 000 ​ 27 , 000 ​ (2) Percentage-of-receivables basis:  (a)  Bad Debt Expense  ( $ 31 , 000 − $ 2 , 300 )   28 , 700  Allowance for Doubtful Accounts  28 , 700  (b)  Bad Debt Expense  ( $ 31 , 000 + $ 370 )   31 , 370 Allowance for Doubtful Accounts  31 , 370 \begin{array}{lrr}   	ext { (a) \quad Bad Debt Expense  ( \$ 31,000 - \$ 2,300 )  }  & 28,700\ 	ext { Allowance for Doubtful Accounts }  & & 28,700\\ 	ext { (b) \quad Bad Debt Expense  ( \$ 31,000 + \$ 370 )  }  & 31,370\ 	ext {Allowance for Doubtful Accounts  }  & & 31,370\end{array}  (a)  Bad Debt Expense  ( $31 , 000 − $2 , 300 )    Allowance for Doubtful Accounts   (b)  Bad Debt Expense  ( $31 , 000 + $370 )   Allowance for Doubtful Accounts  ​ 28 , 700 31 , 370 ​ 28 , 700 31 , 370 ​

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