The trial balance before adjustment of Pratt Company reports the following balances:
Accounts Receivable $100,000
Allowance for doubtful accounts $ 2,500
Sales (all on credit) 650,000
Sales returns and allowances 40,000
(a) Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated to be (1) 7% of gross accounts receivable and (2) 1% of net sales.
(b) Assume that all the information above is the same, except that the Allowance for Doubtful Accounts has a debit balance of $2,500 instead of a credit balance. How will this difference affect the journal entries in par (a)?
Bad Debt Expense $4,500
Allowance for Doubtful Accounts $4,500
Record Estimated Bad Debts 7% of Gross Accounts Receivable ($100,000 X 7% = $7,000) ($7,000 total less $2,500 already on books = ...
Computations and guidance provided.