At December 31, Folgeys Coffee Company reports the following results for its calendar year.

Cash sales $905,000
Credit sales 305,000

Its year-end unadjusted trial balance includes the following items.

Accounts receivable $130,000 debit
Allowance for doubtful accounts 5,500 debit

Prepare the adjusting entry to record bad debts expense assuming uncollectibles are estimated to be (1) 4% of credit sales, (2) 2% of total sales, and (3) 7% of year-end accounts receivable.

Answer and Explanation:

As per the data given in the question,

a) Bad debts expense A/c Dr. $12,200   ($305,000 × 4%)

To Allowance for doubtful accounts A/c $12,200

(Being bad debt expense of 4% credit sales is recorded)

b) Bad debts expense A/c Dr. $24,200 (($905,000 + 305,000) × 2%)

To Allowance for doubtful accounts A/c $24,200

 (Being bad debt expense of 2% credit sales is recorded)

c) Bad debts expense A/c Dr. $14,600    (($130,000 × 7%) + $5,500)

To Allowance for doubtful accounts A/c $14,600

 (Being bad debt expense of 7% of year-end accounts receivable is recorded)