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 $50,000 during the first three months of 2020, and that the Accounts Receivable balance on March 31, 2020, is $22,217.

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 $21,100 and that one account of $87 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

	Date	General Journal	Debit	Credit
1a.	March 31, 2020	Bad debts expense (2% x $50000)	1000.00
		Allowance for doubtful accounts		1000.00
		(To record bad debts expense)
1b.	March 31, 2020	Bad debts expense (3% x $22217)	666.51
		Allowance for doubtful accounts		666.51
		(To record bad debts expense)
2	June 30, 2020	Bad debts expense*	53.49
		Allowance for doubtful accounts		53.49
		(To record bad debts expense)

*Balance required in allowance for doubtful accounts on June 30, 2020 = 3% x $21100 = $633

Existing balance in allowance for doubtful accounts on June 30, 2020 = $666.51 - $87 = $579.51

Adjustment required for bad debts expense = $633 - $579.51 = $53.49

Note: Amounts have been rounded off to 2 decimal places in the absence of specific instructions regarding the same. Kindly round off as required.