A company's December 31 unadjusted trial balance reports a $300,000 debit balance in accounts receivable and a $10,000 credit balance in allowance for doubtful accounts. The company's management estimates that 10% of accounts receivable will not be collected. Which journal entry appropriately records the required adjustment at December 31?
Debit bad debt expense for $20,000; credit allowance for doubtful accounts for $20,000.
To adjust the allowance for doubtful accounts based on management's estimate that 10% of accounts receivable will not be collected, the company needs to recognize an additional $20,000 in bad debt expense. This adjustment reflects the difference between the estimated uncollectible amount and the existing allowance.
This entry incorrectly reduces the allowance for doubtful accounts instead of increasing it. The allowance account should be credited, not debited, to reflect the estimated uncollectible accounts.
Although this entry correctly identifies the need to debit bad debt expense, it overstates the adjustment needed. The total allowance for doubtful accounts should only be $30,000 (10% of $300,000), but since there is already a $10,000 credit balance, only an additional $20,000 is required.
This option is incorrect because it proposes debiting the allowance account rather than crediting it. Furthermore, it implies an excessive adjustment that does not consider the existing credit balance in the allowance account.
This entry correctly reflects the required adjustment to account for the estimated uncollectible accounts. It increases the allowance for doubtful accounts to the necessary amount, aligning with management's estimate of 10% of accounts receivable.
To accurately adjust for estimated uncollectible accounts, the company must recognize an additional $20,000 in bad debt expense, crediting the allowance for doubtful accounts. This ensures that the total allowance reflects the management's estimate of 10% of the accounts receivable, allowing for more accurate financial reporting and adherence to accounting principles.
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