12.A trial balance before adjustment included the following: Debit Credit Accoun

Question

12.A trial balance before adjustment included the following:

                                                                                                                                                                                                Debit                                Credit  

Accounts receivable                                                                                                $120,000

Allowance for doubtful accounts                                                                  730

Sales                                                                                                          $510,000

Sales returns and allowances                               8,000

Prepare the necessary journal entry (in T-account format) assuming that the estimate of uncollectibles is determined by taking 5% of gross accounts receivable

Explanation / Answer

(1) five percent of gross accounts receivable,

When using percentage of receivables as a basis for estimating uncollectible accounts, the CREDIT balance in Allowance for Doubtful Accounts AFTER the adjustment must equal the amount that is estimated to be uncollectible.

120,000 x 5% = 6000 Estimated to be uncollectible
6000 - 730 = 5270
Dr Bad Debt Expense 5270
Cr Allowance for Doubtful Accounts 5270
Allowance for Doubtful Accounts now has a credit balance of 6000

one percent of net sales.

When using percentage of Net Sales as a basis, the current balance in Allowance for Doubtful Accounts is ignored.
(510,000 - 8,000) x 1% = 5020
Dr Bad Debt Expense 5020
Cr Allowance for Doubtful Accounts 5020

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