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 $55,000, and it estimates that 2% 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 $415 credit balance before the adjustment. (b) a $291 debit balance before the adjustment.

Mazie Supply Co.

Adjusting entries under the assumptions that the allowance for doubtful accounts has:

a) A $415 credit balance before the adjustment:

Debit Bad Debts Expense $685

Credit Allowance for Doubtful Accounts $685

To record the bad debts expense for the year.

b) A $291 debit balance before the adjustment:

Debit Bad Debts Expense $1,391

Credit Allowance for Doubtful Accounts $1,391

To record bad debts expense and bring the allowance for doubtful accounts to a balance of $1,100.

Explanation:

a) Accounts Receivable outstanding = $55,000

Uncollectible estimate of 2% =     $1,100

b) With a credit balance of $415, the balance will be brought to $1,100 with an adjusting amount of $685 ($1,100 - $415).,

c) With a debit balance of $291, the balance will be brought to $1,100 with an adjusting amount of $1,391 ($1,100 + 291).

d) When the allowance for doubtful accounts has a credit balance, the bad debts expense is calculated as the difference between the new balance and the old credit balance.  But, if the allowance for doubtful accounts has a debit balance, the bad debts expense would be the addition of the estimated allowance and the debit balance.  These actions will respectively bring the balance of the allowance for doubtful accounts to the new estimated balance.