Megan\'s Products is undecided about which base to use in estimating uncollectib

Question

Megan's Products is undecided about which base to use in estimating uncollectible accounts. On December 31, 2015, the balance in Accounts Receivable was $680,000 and net credit sales amounted to $3,800,000 during 2015. An aging analysis of the accounts receivable indicated that $40,000 in accounts are expected to be uncollectible. Past experience has shown that about 1% of net credit sales eventually are uncollectible.

Prepare the adjusting entries to record estimated bad debt expense using the (1) percentage-of-sales basis and (2) the percentage-of-receivables basis under each of the following independent assumptions:

Allowance for Doubtful Accounts has a credit balance of $3,200 before adjustment. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.) Debit Credit Account Titles and Explanation Percentage-of-sales basis: Percentage-of-receivables basis:

Explanation / Answer

(1) Percentage-of-sales basis:

The following adjusting entry would be the same regardless of the balance in the Allowancefor Doubtful Accounts.

Bad Debt Expense ($3,800,000 × .01)............................................38,000

Allowance for Doubtful Accounts...........................................38,000

(2) Percentage-of-receivables basis:

(a) Bad Debt Expense ($40,000 – $3,200)....................................36,800

Allowance for Doubtful Accounts.....................................36,800

(b) Bad Debt Expense ($40,000 + $730).......................................40,730

Allowance for Doubtful Accounts.....................................40,730

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