Question

During Year 1, Nana Department Store had total sales of $3,000,000, of which 80% were on credit. The beginning balance in Accounts Receivable (on January 1 of Year 1) was $165,000. The beginning balance in the Allowance for Doubtful Accounts (on January 1 of Year 1) was $20,000. The amount of accounts written off as uncollectible during the year was $27,000.
 
The following aging of Accounts Receivable is for Nana Company at the end of Year 1.
Aging of Accounts Receivable
December 31 of Year 1
 
                                                                               Less than              31 days to               61 days to                Over
                                                   Overall                  30 days                  60 days                  90 days                90 days
Total                                             $492,000               $366,000                  $72,000                 $24,000                $30,000
 
Nana Company has developed the following bad debt information from its own past experience.
                                                Percent
                                                Ultimately
Age of Account                      Uncollectible
Less than 30 days                   2
31 to 60 days                           12
61 to 90 days                           35
Over 90 days                           90
 
 Nana Company uses the aging method to determine its ending Allowance for Doubtful Accounts balance. Which ONE of the following is included in the journal entry necessary at the end of the year to record bad debt expense for the year
                
DEBIT to Accounts Receivable for $51,360
                
CREDIT to Accounts Receivable for $58,360
                
DEBIT to Allowance for Doubtful Accounts for $51,360
                
CREDIT to Allowance for Doubtful Accounts for $58,360
                
CREDIT to Bad Debt Expense for $58,360
                
DEBIT to Bad Debt Expense for $51,360

Answer 1

Age of account	Amount	Est.% Uncollectible	Estimated uncollectibles
Less than 30 days	366,000	2%	7320
31 to 60 days	72,000	12%	8640
61 to 90 days	24,000	35%	8400
Over 90 days	30,000	90%	27000
Total	492,000		51,360

Allowance for doubtful accounts, beginning = $20,000

Accounts receivable written off = $27,000

Allowance for doubtful accounts, ending = $51,360

Bad debt expense = Allowance for doubtful accounts, ending - (Allowance for doubtful accounts, beginning - Accounts receivable written off )

= 51,360 - (20,000-27,000)

= 51,360+7,000

= $58,360

Hence, the year end adjusting entry would be as under:

General Journal	Debit	Credit
Bad debt expense	$58,360
Allowance for doubtful accounts		$58,360

Fourth option is correct.

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