Sheridan Company has outstanding accounts receivable totaling $6.57 million as of December 31 and sales on credit during the year of $22.4 million. There is also a credit balance of $11000 in the allowance for doubtful accounts. If the company estimates that 7% of its outstanding receivables will be uncollectible, what will be the amount of bad debt expense recognized for the year?

Sheridan Company

The bad debt expense for the year will be $448,900.

Explanation:

Data and Calculations:

Dec. 31 Outstanding accounts receivable = $6.57 million

Sales on credit =  $22.4 million

Allowance for Doubtful Accounts balance = $11,000 (credit)

Uncollectible allowance estimate = 7% of outstanding balance

Therefore, the Allowance for Doubtful Accounts should have a new balance of $459,900 ($6.57 million  * 7%)

The bad debt expense for the year will be $448,900 ($459,900 - $11,000)

In the adjusting journal entry, Bad Debt Expense will be debited with $448,900 while the Allowance for Doubtful Accounts will be credited with $448,900.  This will then bring the balance of the Allowance for Doubtful Accounts to $459,900 since there is a credit balance of $11,000.