Ayayai corp. uses the percentage of receivables method for recording bad debts expense. the accounts receivable balance is $200,000 and credit sales are $1,000,000. management estimates that 4% of accounts receivable will be uncollectible.
what adjusting entry will ayayai corp. make if the allowance for doubtful accounts has a credit balance of $2,000 before adjustment?

a. bad debt expense 8,000; allowance for doubtful accounts8,000
b. bad debt expense 6,000; allowance for doubtful accounts 6,000
c. bad debt expense 6,000; accounts receivable 6,000
d. bad debt expense 8,000; accounts receivable 8,000

Option (B) is correct.

Explanation:

Amount of which adjusting entry required:

= Amount of uncollectible accounts - Balance in Allowance for uncollectible accounts

= (Balance in accounts receivable × Estimated percentage of accounts receivable to be uncollectible) - Balance in Allowance for uncollectible accounts

= ($200,000 × 4%) - $2,000

= $8,000 - $2,000

= $6,000

Therefore, the adjusting entry is as follows:

Bad debt expense A/c      Dr.  $6,000

To Allowance for uncollectible accounts    $6,000

(To record the bad debt expense)

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