Adria Lopez, owner of Success Systems, realizes that she needs to begin accounti

Question

Adria Lopez, owner of Success Systems, realizes that she needs to begin accounting for bad debts expense. Assume that Success Systems has total revenues of $57,000 during the first three months of 2014, and that the Accounts Receivable balance on March 31, 2014, is $22,167. Required:

1a. Prepare the adjusting entry needed for Success Systems to recognize bad debts expense, which are estimated to be 1% of total revenues on March 31, 2014 (assume a zero unadjusted balance in the Allowance for Doubtful Accounts at March 31). Record the estimated bad debt

1b. Prepare the adjusting entry needed for Success Systems to recognize bad debts expense, which are estimated to be 2% of accounts receivable on March 31, 2014 (assume a zero unadjusted balance in the Allowance for Doubtful Accounts at March 31). Record the estimated bad debt

2. Assume that Success Systems' Accounts Receivable balance at June 30, 2014, is $21,100 and that one account of $83 has been written off against the Allowance for Doubtful Accounts since March 31, 2014. If Adria Lopez uses the method prescribed in Part 1b, what adjusting journal entry must be made to recognize bad debts expense on June 30, 2014?

Explanation / Answer

1a.
Bad debts expense Dr. 1180 (2% * 59000)
Allowance for doubtful accounts Cr. 1180

1b.
Bad debts expense Dr. 671.01 (3% * 22367)
Allowance for doubtful accounts Cr. 671.01

2.
Bad debt expense Dr. 47.99 (3%*21100 - 671.01 + 86)
Allowance for doubtful accounts Cr. 47.99

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