Question

At the end of a period (before adjustment), Allowance for Doubtful Accounts has a credit balance of $250. The credit sales for the period total $500,000. If the company estimates uncollectible accounts expense at 1% of credit sales, the amount of bad debt expense to be recorded in an adjusting entry is $4,750.

a. True.
b. False.

Answer 1

Answer:

b. False

Explanation:

The company estimates that 1% of $500,000, which is $5,000, will be uncollectible. Under the Allowance method of bad debts, the accounts department will record the following entry:

Bad Debts (Dr.)               $5,000

             Allowance for Doubtful Accounts (Cr.)               $5,000

So, the amount of bad debt expense to be recorded in the adjusting entry is $5,000 and not $4,750. The credit of $5,000 to contra-asset account will result in a closing balance of $5,250 for Allowance for Doubtful Accounts.