Question

Use information below for the question. Credit Sales for the year: $1,000,000

Accounts Receivable Balance: 100,000

Allowance for Doubtful Accounts: 4,000 credit balance

1a. If bad debt is estimated as 1% of credit sales, the adjusting entry for bad debt expense includes a debit for: ______

1b. If your company estimates that it will not collect 5% of its accounts receivable, the year-end adjustment to Allowance for Doubtful Accounts will be: _________

Please explain.

Answer 1

1a. If bad debt is estimated as 1% of credit sales, the adjusting entry for bad debt expense includes a debit for $10000($1000000*1%).

1b. If your company estimates that it will not collect 5% of its accounts receivable, the year-end adjustment to allowance for doubtful accounts will be: 100000*5%=$5000 credit.

Allowance for doubtful accounts is a contra account to accounts receivable account. Thus, the final balance of accounts receivable is calculated as accounts receivable balance(-) allowance for doubtful account.