Question

The Exam Fun Co. had Accounts Receivable of $100,000 and a credit balance of $2,000 in Allowance for Doubtful Accounts on 12/31/10. The company estimates that 5% of the receivables will not be collected. Which of the following is the correct journal entry for recording the estimate of bad debt expense?A. dr. Bad Debt Expense 3,000 and cr. Allowance for Doubtful accounts 3,000
B. dr. Bad Debt Expense 5,000 and cr. Accounts Receivable 3,000
C. dr. Bad Debt Expense 5,000 and cr. Allowance for Doubtful Accounts 5,000
D. dr. Bad Debt Expense 7,000 and cr. Allowance for Doubtful Accounts 7,000

Answer 1

Answer:

A. dr. Bad Debt Expense 3,000 and cr. Allowance for Doubtful accounts 3,000

Explanation:

Bad debt Expense will be calculated using the percentage of debt loss. The expense will be calculated using the account receivable balance.

Closing Value of the Allowance for Doubtful Accounts will be as follow

Closing Balance = $100,000 x 5% = $5,000

As Allowance for Doubtful Accounts already have credit balance of $2,000, we need to adjust the remainder to make the closing balance of Allowance for Doubtful Accounts $5,000 at the year end.

Adjustment Value = $5,000 - $2,000 = $3,000

Answer 2

Answer:

The answer is A. dr. Bad Debt Expense with $3,000 and cr. Allowance for Doubtful accounts with $3,000.

Explanation:

The essence of the above entries is to bring the balance for Allowance for Doubtful Accounts to the new estimated 5% of the Accounts Receivable balance of $100,000.

Allowance for Doubtful Accounts is an adjustable and contra account to the Accounts Receivable.

Management can use any method: direct write-off and aging analysis to determine the balance sheet figure for the account.  But the entry to be journalized at period end is either a credit (to increase the balance) or a debit (to decrease the balance).