ACCT 201 Principles of Financial Accounting Practice Exam - Chapter 7 Reporting & Analyzing Receivables and Investments Dr. Fred Barbee Solution to Short-Problem #2

Short Problem #2

At December 31 of the current year, a company reported the following:

Total sales for current year: $780,000, includes $160,000 in cash sales.
Accounts receivable balance at Dec. 31, current year: $190,000
Bad debts written off during the current year: $6,800
Balance of Allowance for Doubtful Accounts at January 1, current year: $8,300

Prepare the necessary adjusting entries to record bad debts expenses assuming this company's bad debts are estimated to equal:

1. 1.5% of credit sales
2. 5% of accounts receivable.

Journal entries are dated December 31 of the current year.

Bad Debt Expense	9,300
Allowance for Doubtful Accounts		9,300

($780,000 - $160,000) x 0.15 = $9,300

Bad Debts Expense	8,000
Allowance for Doubtful Accounts		8,000

Required balance ($190,000 x 5%)	$9,500
Balance before adjusting entries: ($8,300 - $6,800)	1,500
Required adjustment	$8,000