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    Journal entry for bad debt expense

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    1. A company had a normal balance of $10,000 in its Accounts Receivable account, and a normal balance of $500 in its Allowance for Doubtful Accounts account. During the year it had $500,000 in sales. At the end of the year it determined that 3.5% of sales would be uncollectible.

    a. Prepare the adjusting entry that records bad debts expense.
    b. Prepare the journal entry that records a write-off of a $700 uncollectible account receivable.

    2. What are the purposes of making an adjusting entry for expected bad debts, and the use of the Allowance for Doubtful Accounts account? Narratives about your prior or current experience with bad debts are welcome.

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    Solution Preview

    Solution is provided in a separate word document along with necessary explanatory notes and detailed answer to question No 2.

    1 Treatment of Estimated Bad Debt expense and Actual bad debts reported by Allowance for Doubtful Account Method: Within the Allowance method there are two approaches to estimating bad debts expenses.

    (A) The percentage of sales approach (B) Percentage of Accounts Receivable method

    A . Adusting entry that records bad debts expense by percentage of Sales Approach of Allowance Method:

    The percentage of sales approach matches cost and Revenue. In this approach bad debts are estimated as certain percentage of net sales based on past experience.
    Bad debts were estimated at10% of all credit sales.
    Credit sales 500,000
    Less: Sales return & Allowances 0
    Net Sales: 500,000
    Bad Debt expenses (500,000 X(3.5/100) = ...

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    This solution helps with a journal entry for a bad debt expense.