10. A company's December 31 unadjusted trial balance reports a $300,000 debit balance in accounts receivable and a $10,000 credit balance in allowance for doubtful accounts. The company's management estimates that 10% of accounts receivable will not be collected. Which journal entry appropriately records the required adjustment at December 31?
Answer: D
Debit bad debt expense for $20,000; credit allowance for doubtful accounts for $20,000
To appropriately adjust for estimated uncollectible accounts, the company needs to recognize that 10% of $300,000 in accounts receivable amounts to $30,000. However, since there is already a $10,000 credit balance in the allowance for doubtful accounts, only an additional $20,000 needs to be recorded as the adjustment.
A) Debit allowance for doubtful accounts for $20,000; credit bad debt expense for $20,000
This option incorrectly debits the allowance for doubtful accounts rather than recognizing the additional expense necessary to adjust the allowance. The adjustment should increase the allowance through a credit to reflect the estimated uncollectible amount.
B) Debit bad debt expense for $30,000; credit allowance for doubtful accounts for $30,000
This choice overestimates the necessary adjustment. While the total estimated uncollectible amount is $30,000, the company only needs to record an additional $20,000 adjustment because of the existing $10,000 balance in the allowance for doubtful accounts.
C) Debit allowance for doubtful accounts for $30,000; credit bad debt expense for $30,000
This option is incorrect as it suggests debiting the allowance account, which would decrease it rather than adjusting it to the required balance. The correct approach is to increase the allowance, thereby crediting it.
D) Debit bad debt expense for $20,000; credit allowance for doubtful accounts for $20,000
This option accurately reflects the required adjustment. By debiting bad debt expense for $20,000, the company acknowledges the expense incurred during the period, while the credit to the allowance for doubtful accounts appropriately increases it to the estimated total of $30,000.
Conclusion
The correct entry appropriately adjusts the allowance for doubtful accounts to reflect the estimated uncollectible amount while considering the existing balance. All other options fail either by miscalculating the adjustment amount or incorrectly adjusting the allowance account itself. Thus, option D is the only choice that accurately meets the accounting requirement for this adjustment.