Exercise 7-13 (Static) Percent of accounts receivable method LO P3
Mazie Supply Company uses the percent of accounts receivable method. On December 31, it has outstanding accounts receivable of $55,000, and it estimates that 2% will be uncollectible. Prepare the year-end adjusting entry to record bad debts expense under the assumption that the Allowance for Doubtful Accounts has:
(a) a $415 credit balance before the adjustment.
(b) a $291 debit balance before the adjustment.
Journal entry worksheet
Prepare the year-end adjusting entry to record bad debts expense under the assumption that the Allowance for Doubtful Accounts has a $415 credit balance before the adjustment. Note: Enter debits before credits.
Transaction General Journal Debit Credit
(a)
The correct answer and explanation is:
Here’s the correct journal entry and an explanation:
Journal Entry for (a): Allowance for Doubtful Accounts has a $415 Credit Balance
Journal Entry:
| Date | Account Titles & Explanation | Debit ($) | Credit ($) |
|---|---|---|---|
| December 31 | Bad Debts Expense | 685 | |
| Allowance for Doubtful Accounts | 685 |
Calculation:
- Accounts Receivable = $55,000
- Estimated Uncollectible Percentage = 2%
- Required Allowance Balance = $55,000 × 2% = $1,100
- Existing Credit Balance in Allowance for Doubtful Accounts = $415
- Adjustment Needed = $1,100 – $415 = $685
Explanation:
Mazie Supply Company follows the percent of accounts receivable method to estimate bad debts. This method applies a fixed percentage (2%) to outstanding accounts receivable ($55,000) to determine the estimated uncollectible amount.
On December 31, the Allowance for Doubtful Accounts should have a balance of $1,100. However, before the adjustment, it already has a credit balance of $415, meaning that the company has already set aside some funds for uncollectible accounts.
To bring the balance up to the required $1,100, an additional amount of $685 must be recorded as Bad Debts Expense. This adjusting entry ensures that the company’s financial statements properly reflect the estimated bad debt expense, in line with the matching principle (which requires expenses to be recorded in the same period as the related revenue).
By making this entry:
- The Bad Debts Expense account increases by $685 (debit).
- The Allowance for Doubtful Accounts increases by $685 (credit), ensuring the balance reaches the required $1,100.
This method provides a realistic estimate of expected bad debts, preventing overstatement of accounts receivable and ensuring a more accurate net realizable value of the receivables.
Now, I’ll generate an image of this journal entry for clarity.
Here is the visual representation of the journal entry for part (a). Let me know if you need further clarifications or adjustments! Now, do you also need the journal entry for part (b)?
