At each calendar year-end, Mazie Supply Co. uses the percent of accounts receivable method to estimate bad debts. On December 31, 2017, it has outstanding accounts receivable of $135,500, and it estimates that 5% will be uncollectible. Prepare the adjusting entry to record bad debts expense for year 2017 under the assumption that the Allowance for Doubtful Accounts has: (a) a $2,304 credit balance before the adjustment. (b) a $678 debit balance before the adjustment.

Answer and Explanation:

The journal entries are shown below:

a. Bad Debt Expense ($135,500 × 5% - $2,304) Dr. $4,471

             To Allowance for Doubtful Accounts Cr. $4,471

(Being the bad debt expense is recorded)

For recording this we debited the bad debt expense as it increased the expense and credited the allowance for doubtful debts as it decreased the value of the assets

b.  Bad Debt Expense ($135,500 × 5% + $678) Dr. $7,453

             To Allowance for Doubtful Accounts Cr. $7,453

(Being the bad debt expense is recorded)

For recording this we debited the bad debt expense as it increased the expense and credited the allowance for doubtful debts as it decreased the value of the assets

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