Santana Rey, owner of Business Solutions, realizes that she needs to begin accou

Question

Santana Rey, owner of Business Solutions, realizes that she needs to begin accounting for bad
debts expense. Assume that Business Solutions has total revenues of $44,000 during the first three months
of 2012, and that the Accounts Receivable balance on March 31, 2012, is $22,867.

Required

1. Prepare the adjusting entry needed for Business Solutions to recognize bad debts expense on March
31, 2012, under each of the following independent assumptions (assume a zero unadjusted balance in
the Allowance for Doubtful Accounts at March 31).
a. Bad debts are estimated to be 1% of total revenues. (Round amounts to the dollar.)
b. Bad debts are estimated to be 2% of accounts receivable. (Round amounts to the dollar.)

2. Assume that Business Solutions

Explanation / Answer

1. 44,000*.01= 440 DR Bad Debt Expense 440 CR Allowance for Doubtful Accounts 440 22,867*.02= 457 (rounded) DR Bad Debt Expense 457 CR Allowance For Doubtful Accounts 457 2. The allowance for doubtful accounts will be 457-100=357. The proper amount will be 20,250 *.02= 405 So the proper entry will be DR Bad Debt Expense 48 (405-357) CR Allowance For Doubtful Accounts 48 3. Probably not a good idea since the direct write-off method is not proper accounting under GAAP (generally accepted accounting principles).

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