Question

(Recording Bad Debts) Duncan Company reports the following financial information before adjustments.

	Debit	Credit
Accounts receivables	\(100,000
Allowance for doubtful accounts		\)2,000
Sales revenue (All on credit)		900,000
Sales return and allowance	50,000

Instructions

Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit balance.

Short answer

The total debit and credit side of the journal is$9,500.

Step-by-step solution

Definition of Sales return and Allowances

Sales return and allowance account is a contra-revenue account reporting defective goods or defective orders returned by a customer.

Journal Entries

Date	Accounts and explanation	Debit $	Credit $
a	Bad debt expenses	$3,000
	Allowance for doubtful accounts		$3,000
b	Bad debt expenses	$6,500
	Allowance for doubtful accounts		$6,500

Working note:

1. Calculation of allowance:$$\begin{gathered} \mathrm{Allowance}\mathrm{for}\mathrm{doubtful}\mathrm{accounts}=\left(\mathrm{Accounts}\mathrm{receivables}\times \mathrm{Estimated}\mathrm{bad}\mathrm{debt}\mathrm{percentage}\right)-\mathrm{Credit}\mathrm{balance}\mathrm{of}\mathrm{allowance} \\ =\left(\$100,000\times 5\%\right)-2000 \\ =\$3,000 \end{gathered}$$

2. Calculation of allowance:

$$\begin{gathered} \mathrm{Allowance}\mathrm{for}\mathrm{doubtful}\mathrm{accounts}=\left(\mathrm{Accounts}\mathrm{receivables}\times \mathrm{Estimated}\mathrm{bad}\mathrm{debt}\mathrm{percentage}\right)+\mathrm{Debit}\mathrm{balance}\mathrm{of}\mathrm{allowance} \\ =\left(\$10,000\times 5\%\right)+1500 \\ =\$6,500 \end{gathered}$$