Question

Computing Bad Debts and Preparing Journal Entries) The trial balance before adjustment of Taylor Swift Inc. shows the following balances.

	Debit	Credit
Accounts Receivable	\(90,000
Allowance for Doubtful Accounts	1,750
Sales revenue (all on credit)		\)680,000

Instructions

Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 5% of gross accounts receivable and Allowance for Doubtful Accounts has a $1,700 credit balance.

Short answer

Debit and Credit side of journal totals$8,150.

Step-by-step solution

Definition of Bad Debt Expenses

Bad debt expense is an account reporting the amount of money due from the receivables that are now uncollectible.

Journal entries

Date	Accounts and Explanation	Debit $	Credit $
a	Bad debt expenses	$5,350
	Allowance for doubtful accounts		$5,350
	(To record the allowance for doubtful accounts)
b	Bad debt expenses	$2,800
	Allowance for doubtful accounts		$2,800
	(To record the allowance for doubtful accounts)
		$8,150	$8,150

Working note:

1. Calculation of allowance:$$\begin{gathered} \mathrm{Allowance}\mathrm{for}\mathrm{doubtful}\mathrm{accounts}=\left(\mathrm{Accounts}\mathrm{receivable}\times \mathrm{Estimated}\mathrm{bad}\mathrm{debt}\mathrm{percentage}\right)+\mathrm{Debit}\mathrm{balance}\mathrm{of}\mathrm{allowance} \\ =\left(\$90,000\times 4\%\right)+1,750 \\ =\$5,350 \end{gathered}$$2.Calculation of allowance:$$\begin{gathered} \mathrm{Allowance}\mathrm{of}\mathrm{doubtful}\mathrm{accounts}=\left(\mathrm{Accounts}\mathrm{receivables}\times \mathrm{Estimated}\mathrm{bad}\mathrm{debt}\mathrm{percentage}\right)-\mathrm{credit}\mathrm{balance}\mathrm{of}\mathrm{allowance} \\ =\left(\$90,000\times 5\%\right)-1,700 \\ =\$2,800 \end{gathered}$$