The allowance account before adjustment has a credit balance of $1,170. Bad debt expense for the upcoming year is estimated to be 2% of net sales, which are $328,000.
What is the balance in the Allowance for Doubtful Accounts ledger after the adjusting entry is recorded?
The Allowance Method and Bad Debt:
Generally Accepted Accounting Principles (GAAP) requires companies to use the allowance method for bad debt. Under the allowance method bad debt expense is estimated and accrued in the same period as the related revenue.
Answer and Explanation:
The percentage of sales method records bad debt expense by multiplying net sales by the percent that a company expects to be uncollectible. The balance in the allowance for doubtful accounts is not considered prior to the adjusting journal entry.
The adjusting entry is calculated as:
$328,000 * .02 = $6,560
The balance in the allowance for doubtful accounts after the adjusting entry is recorded is calculated as:
$1,170 + $6,560 = $7,730
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from Accounting 101: Financial AccountingChapter 7 / Lesson 3