Berkley Associates uses the balance sheet approach to estimate bad debts expense

Question

Berkley Associates uses the balance sheet approach to estimate bad debts expense. It started 2016 with a credit balance of $10,000 in its allowance for uncollectible accounts. Berkley wrote off $200,000 of bad debts during 2016, and its aging of accounts receivable at 12/31/16 indicates it should have a credit balance of $5,000 in the allowance for uncollectible accounts. No other journal entries to the allowance have been made. Berkley's journal entry to record bad debts expense should include a: Debit to B.D. expense of $195,000. Debit to the allowance for $5,000. Credit to B.D. expense for $200,000. Credit to the allowance for $200,000.

Explanation / Answer

Calculation of Bad debts Expense for the year 2016:

Beginning Credit Balance in Allowance accounts = $10000

Less: bad debts written off during the year = $200,000

Net Debit balance in allowance account at the end of year = $190,000

Credit balance required in the allowance account at the end of year = $5000

Bad Debts expense for the year = $190000+5000 = $195000

Now the Journal entry for bad debts shall be as under:

Bad debts expense (debit) $195000

Allowance for doubtful debts (Credit) $195000

Hence correct answer shall be :

a.Debit to bad dents expense $195,000

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