A company has $90,000 in outstanding accounts receivable and it uses the allowance method to account for uncollectible accounts. Experience suggests that 4% of outstanding receivables are uncollectible. The current balance (before adjustments) in the allowance for doubtful accounts is an $800 CREDIT. The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for:

A. $2,800
B. $3,568
C. $3,632
D. $3,600
E. $4,400

A. $2,800

Explanation:

When a company makes sales on account, debit accounts receivable and credit sales. Based on assessment, some or all of the receivables may be uncollectible.  

To account for this, debit bad debit expense and credit allowance for doubtful debt. Should the debt become uncollectible (i.e go bad), debit allowance for doubtful debt and credit accounts receivable.

Amount assessed to be uncollectible

= 4% × $90,000

= $3,600

Additional Amount to be allowed for

= $3,600 - $800

= $2,800

This will be posted as debit to bad debt and a credit to allowance for doubtful debts account.

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