Question

Santana Rey, owner of Business Solutions, realizes that she needs to begin accounting for bad debts expense. Assume that Business Solutions has total revenues of $60,000 during the first three months of 2020, and that the Accounts Receivable balance on March 31, 2020, is $21,967.

Required:
1a. Prepare the adjusting entry to record bad debts expense, which are estimated to be 2% of total revenues on March 31, 2020. There is a zero unadjusted balance in the Allowance for Doubtful Accounts at March 31.
1b. Prepare the adjusting entry to record bad debts expense, which are estimated to be 3% of accounts receivable on March 31, 2020. There is a zero unadjusted balance in the Allowance for Doubtful Accounts at March 31.
2. Assume that Business Solutions's Accounts Receivable balance at June 30, 2020, is $20,950 and that one account of $86 has been written off against the Allowance for Doubtful Accounts since March 31, 2020. If Rey uses the method in part 1b, what adjusting journal entry is made to recognize bad debts expense on June 30, 2020?

Answer 1

1a]	Bad debts expense [60000*2%]	$ 1,200
	Allowance for doubtful accounts		$ 1,200
1b]	Bad debts expense [21967*3%]	$             659
	Allowance for doubtful accounts		$             659
2]	Bad debts expense [20950*3%-(657-86)]	$               58
	Allowance for doubtful accounts		$               58