At each calender year end Maize Supply co uses the percent of accounts receivabl

Question

At each calender year end Maize Supply co uses the percent of accounts receivable METHOD to estimate bad debts.

On 31 december 2013 it has an outstanding accounts receivable of $55,000 and it estimates that 2% will be uncollectible.

prepare the adusting entry to record bad debt expense for year 2013 under the assumption that the Allowance for Doubtful Accounts has

a) $415 credit balance before the adjustment

b) $291 debit balance before the adjustment

please use Percent of accounts receivable method

Explanation / Answer

PROVISION TO BE MADE FOR THE YEAR USING PERCENT OF ACCOUNTS RECIEVABLE METHOD = OUTSTANDING ACCOUNTS RECEIVABLE*ESTIMTED PERCENTAGE OF UNCOLLECTIBLE

= 55000*2%

=$1100

a)     $415 credit balance before the adjustment

ANS:- SINCE WE HAVE CREDIT BALANCE BEFORE THE ADJUSTMENT WE WILL HAVE TO MAKE THE PROVISION FOR THE REMAINING BALANCE i.e. $685 [1100-415]

JOURNAL ENTRY:-

DEBIT BAD DEBT EXPENSE = 685

CREDIT ALOWANCE FOR DOUBTFUL DEBTS = 685

b)    $291 debit balance before the adjustment

ANS:- SINCE WE HAVE DEBIT BALANCE BEFORE ADJUSTMENT WE HAVE FIRST MAKE THE DEBIT BALANCE EQUAL TO NIL BY CREDITING IT AND CREATE A NEW PROVISION OF $1100 AFTER MAKING THE DEBIT BALANCE EQUAL TO ZERO.

JOURNAL ENTRY:-

DEBIT BAD DEBT EXPENSE [291+1100] = 1391

CREDIT ALOWANCE FOR DOUBTFUL DEBTS = 1391

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