Question

A trial balance before adjustment included the following: Debit Credit Accounts receivable $120,000 Allowance for doubtful accounts 730 Sales $510,000 Sales returns and allowances 8,000 Give journal entries assuming that the estimate of uncollectibles is determined by taking (1) 5% of gross accounts receivable and (2) 1% of net sales.

Answer 1

(1) if we assume that doubtful debts are 5% of gross accounts receivable, then

Doubtful debts = $120,000*5% = $ 6,000

We already have the allowance for doubtful debts amounting to 730. Hence we have to make an additional allowance of

6000-730= 5270 and entry will be as follows

Allowance for doubtful debts Dr. 5270

To Accounts Receivables. 5270

(2)If we assume total allowance for doubtful debts to be 1% of net sales then

Net sales = Gross sales - returns

I.e. $510000-$8000= $502,000

And 1% of 502,000 is $ 5020

We already have allowance of 730 hence additional allowance required is 5020-730= $ 4290

And entry will remain the same

Allowance for doubtful debts Dr. 4290

To Accounts receivable. 4290