Question

Bill LTd uses the allaowance method to record bad debts expense and conludes, using the aging of account receivable method, that 1% of accounts receivable (gross) will become uncollectable. Accounts receivable (gross) has a balance of $ 500,000 at the end of the year, and the allowance for doubtful debt has a credit balance of $3000.

a/ Prepare the adjusting journal entry to record bad debt expense for the year (narration is nor required).

b/ if the allowance for doughtful debts had a debit balance of $800 instead of a credit balance of $3000, determine the amount to be repoerted for bad debts expense.

Answer 1

a) 1% of $ 500,000 is $5,000. The account balance of Bad Debts already has a crredit of $3,000 so we need to make the provision of another $ 2,000. Entry will be:

• Profit and Loss A/c Dr. $2,000
  • To Provision for doubtful debts A/c $2,000

b) In case there is a debit balance in provision for bad and doubtful debts which is an unlikely situation we need to pass the following entry.

• Profit and Loss A/c Dr. $5,800
  • ZTo Provision for doubtful debts A/c $ 5,800