Duncan Company reports the following financial information before adjustments. Dr. Cr. Accounts Receivable $100,000 Allowance for Doubtful Accounts $2,000 Sales Revenue (all on credit) 900,000 Sales Returns and Allowances 50,000 Prepare the journal entry to record bad debt expense assuming Duncan Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit balance.

a. Debit Bad debt expense $3,000

Credit Allowance for doubtful debt $3,000

Being entries to record additional bad debt expense

b. Debit Bad debt expense $5,000

Credit Allowance for doubtful debt $5,000

Being entries to record allowance for doubtful debt

Explanation:

A company can either makes sales on account or by cash collection. When sales is made on account, the entries posted are debit accounts receivable and credit sales.

To account for receivables that may be incollectible, debit bad debit expense and credit allowance for doubtful debt. Should the debt become uncollectible (i. e go bad), debit allowance for doubtful debt and credit accounts receivable.

Where a debit that had previously been determined to have gone bad gets settled, debit cash and credit bad debt expense.

Net sales is the difference between total sales and sales returns, allowances.

Net sales = $900,000 - $50,000

= $850,000

Given that

a. Duncan Company estimates bad debts at 5% of accounts receivable,

Bad debt = 5% * $100,000

= $5,000

Since the allowance for doubtful debt already has a credit balance of $2,000, additional provisioning required

= $5,000 - $2,000

= $3,000

b. 5% of accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit balance.

The $1,500 represents the amount written off during the year. This will have no effect on the allowance to be made at year end.

Answer: The following journal entries apply:

a) Debit Bad debt expense $45,500

Credit Allowance for doubtful accounts $45,500

b) Debit Bad debt expense $49,000

Credit Allowance for doubtful accounts $49,000

Explanation: All the sales revenue are on credit to the tune of $900,000, however, there was sales return and allowance of $50,000, which has to be backed out from the credit sales to arrive at the net credit sales of $850,000. This amount would be added to the accounts receivable of $100,000 to arrive at the total accounts receivable of $950,000.

a) 5% of $950,000 is $47,500. With credit balance of $2,000 in allowance for doubtful accounts, bad debt expense (addition) is $45,500 ($47,500 - $2,000).

b) Since 5% of $950,000 is $47,500 and there is a debit balance of $1,500 in allowance for doubtful accounts, bad debt expense (to reinstate allowance account to $47,500) is $49,000 ($47,500 + $1,500).