Question

Megan's Products is undecided about which basis to use in estimating uncollectible accounts. On December 31, 2020, the balance in Accounts Receivable was $308,000 and net credit sales amounted to $2,700,000 during 2020. An aging analysis of the accounts receivable indicated that $31,000 in accounts are expected to be uncollectible. Past experience has shown that about 1% of net credit sales eventually are uncollectible. Prepare the adjusting entries to record estimated bad debt expense using the (1) percentage of sales basis and (2) the percentage of receivables basis under each of the following independent assumptions:

(a)

Allowance for Doubtful Accounts has a credit balance of $2,300 before adjustment. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Account Titles and Explanation	Debit	Credit
Percentage-of-sales basis:
Percentage-of-receivables basis:

Answer 1

a) Percentage of sales basis:

Date	Account Title and Explanations	Debit	Credit
31-12-2020	Bad debt expense	27,000
	Allowance for bad debts		27,000
	(Being provision made for bad debts)

Note: In case of percentage of sales basis, any existing credit balance of allowance for bad debts is to be ignored and provision is to be made on basis of percentage of sales. Accordingly we have made provision @1% of net credit sales which is equal to $27,000 ($2,700,000*1%).

Percentage of receivable basis:

Date	Account Title and Explanations	Debit	Credit
31-12-2020	Bad debt expense	28,700		($31,000-$2,300)
	Allowance for bad debts		28,700	($31,000-$2,300)
	(Being provision made for bad debts)