Question

1. Entity G uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $500,000. Management estimates that 5% of accounts receivable will be uncollectible. What adjusting entry will Entity G make if the Allowance for Doubtful Accounts has a credit balance of $4,000 before adjustment?

   		Dr. Bad Debt Expense                                     21,000       Cr. Accounts Receivable                                             21,000
   		Dr. Bad Debt Expense                                     21,000       Cr. Allowance for Doubtful Accounts                      21,000
   		Dr. Bad Debt Expense                                     25,000       Cr. Allowance for Doubtful Accounts                      25,000
   		Dr. Allowance for Doubtful Accounts     29,000 Cr. Bad Debt Expense 29,000

Answer 1

Bad debt expense = (Accounts receivable * 5%) - Credit balance in the allowance for doubtful accounts

= ($500,000 * 5%) - $4,000

= $25,000 - $4,000

= $21,000

The answer is

Dr. Bad Debt Expense                                     21,000
      Cr. Allowance for Doubtful Accounts                      21,000