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19 August, 17:55

Ayayai Corp. uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $200,000 and credit sales are $1,000,000. Management estimates that 4% of accounts receivable will be uncollectible.

What adjusting entry will Ayayai Corp. make if the Allowance for Doubtful Accounts has a credit balance of $2,000 before adjustment?

a. Bad Debt Expense 8,000; Allowance for Doubtful Accounts8,000

b. Bad Debt Expense 6,000; Allowance for Doubtful Accounts 6,000

c. Bad Debt Expense 6,000; Accounts Receivable 6,000

d. Bad Debt Expense 8,000; Accounts Receivable 8,000

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Answers (1)
  1. 19 August, 18:00
    0
    Option (B) is correct.

    Explanation:

    Amount of which adjusting entry required:

    = Amount of uncollectible accounts - Balance in Allowance for uncollectible accounts

    = (Balance in accounts receivable * Estimated percentage of accounts receivable to be uncollectible) - Balance in Allowance for uncollectible accounts

    = ($200,000 * 4%) - $2,000

    = $8,000 - $2,000

    = $6,000

    Therefore, the adjusting entry is as follows:

    Bad debt expense A/c Dr. $6,000

    To Allowance for uncollectible accounts $6,000

    (To record the bad debt expense)
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