Account receivable for Crimson Inc. at the end of December 31, 2018 totals $200,000. This balance is due to four customers not paying their bill by the end of the year. James owes $50,000; Fred owes $64,000; Bernie owes 36,000; and Terry owes $50,000. The probabilities of James not paying has been determined to be 20% and Fred, Bernie, and Terry were each assessed a 10% probability. If the balance in the allowance for doubtful accounts has a debit balance of $10,000 then what would be the adjusting entry to needed to update Crimson Inc.’s books?

The adjusting entry to needed to update Crimson Inc.’s books is:

Debit Bad debt expense                                $35,000

Credit Allowance for doubtful accounts       $35,000

(To record bad debt expense)

Explanation:

Crimson Inc. uses the credit risk loss percentage in estimating the amount of accounts receivable that is uncollectible. This approach is similar to the aging method. We would calculate the estimated uncollectible amount as follows:

Debtor  Estimated     Percent   Uncollectible amount

James   $50,000        20%       $10,000

Fred      $64,000        10%         $6,400

Bernie   $36,000        10%         $3,600

Terry     $50,000        10%         $5,000

Total   $200,000                     $25,000

If the balance in the allowance for doubtful accounts has a debit balance of $10,000 then Bad debt expense will be $25,000 + $10,000 = $35,000. The required adjustment is as recorded above.

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