During its first year of operations, Gehrig Company had credit sales of $3,000,000, of which $400,000 remained uncollected at year-end. The credit manager estimates that $18,000 of these receivables will become uncollectible.

Prepare the journal entry to record the estimated uncollectibles. (Assume an unadjusted balance of zero in Allowance for Doubtful Accounts.)

Bad Debts (Dr.)                                               $18,000

                              Allowance for Doubtful Accounts (Cr.)          $18,000

Explanation:

When the management expects that it will not be able to collect a certain amount of receivable, it records Bad Debts in the Profit or Loss and a Credit entry to it is charged to contra-asset account known as "Allowance for Doubtful Accounts". It should be kept in mind that, at this stage it is only the expectation of management that the receivable from customers will not be collected. When the management is certain about the default of customer, it write-offs the Receivables. This is done by debiting Allowance for Doubtful Account and crediting Accounts Receivables. Write-off has no impact on the Net Realizable Value (Accounts Receivables - Allowance for Doubtful Account).

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bad debt expense 18,000 debit

  allowance for doubtful accoutn 18,000 credit

Explanation:

as we are given with the estimated amount of uncollectible and there is no beginning alloance balance as it is their first year of operations the journal entry will be for the full amount.

we record the alowance in the credit side as conrta-asset account

and debit the bad debt expense associate with the receivables to match agaisnt the period they are generated.

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