Linhart Co. uses the percentage-of-accounts receivable basis to record bad debts

Question

Linhart Co. uses the percentage-of-accounts receivable basis to record bad debts expense. It estimates that 1% of accounts receivable will become uncollectible. Accounts receivable are $473,800 at the end of the year, and the allowance for doubtful accounts has a credit balance of $1,683.


1) Prepare the adjusting journal entry to record bad debts expense for the year.


2) If the allowance for doubtful accounts had a debit balance of $892 instead of a credit balance of $1,683, determine the amount to be reported for bad debts expense.

Explanation / Answer

If 1% of A/R are uncollectible, then .01* 473,800= 4,738 should be the balance in allowance for doubtful accounts (ADA). Since there are 1,683 there already we need to add 3.055. DR Bad Debt Expense 3,055 CR ADA 3,055 If there were a debit balance of 892 we would need to add 892+ 4,738= 5,630 so bad debt expense would be 5,630.

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