A journal entry records an estimate of uncollectible accounts using the allowance method with $100,000 in accounts receivable. 50% of the receivables are 90 days overdue and estimated to be 50% uncollectible. The remainder is under 30 days and estimated to be 10% uncollectible. There is a credit balance of $200 before adjustment. Which journal entry reflects this scenario?
Debit bad debt expense for $29,800; credit allowance for doubtful accounts for $29,800.
To determine the necessary journal entry for estimating uncollectible accounts using the allowance method, we analyze the accounts receivable. With $100,000 in total receivables, half are overdue with a 50% uncollectibility rate, and the other half is under 30 days with a 10% uncollectibility rate. This results in a required adjustment of $29,800 to the allowance for doubtful accounts.
This entry correctly reflects the estimated uncollectible accounts based on the calculations. The overdue receivables contribute $25,000 (50% of $50,000) and the current receivables contribute $5,000 (10% of $50,000), totaling $30,000. After considering the existing credit balance of $200 in the allowance account, the adjustment needed is $29,800.
This choice incorrectly credits accounts receivable instead of the allowance for doubtful accounts. The purpose of the allowance method is to estimate uncollectibles without directly affecting the accounts receivable balance, hence this entry is not appropriate for the scenario.
This entry reflects an incorrect total for the estimated uncollectible accounts. The calculation does not accurately consider the existing credit balance in the allowance for doubtful accounts, leading to an overestimation of the required adjustment.
Similar to choice B, this entry incorrectly credits accounts receivable instead of the allowance account. Additionally, the amount debited and credited is incorrect, failing to account for the existing balance in the allowance account.
The allowance method requires accurate estimation of uncollectible accounts, which in this case totals $30,000 before adjustment. After accounting for the existing credit balance in the allowance for doubtful accounts, the necessary journal entry is a debit to bad debt expense and a credit to the allowance account for $29,800. This ensures the financial statements correctly reflect the anticipated losses from uncollectible accounts while maintaining the integrity of the accounts receivable balance.
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