6. A journal entry records an estimate of uncollectible accounts using the allowance method with $100,000 in accounts receivable. 50% of the receivables are 90 days overdue and estimated to be 50% uncollectible. The remainder is under 30 days and estimated to be 10% uncollectible. There is a credit balance of $200 before adjustment. Which journal entry reflects this scenario?
Answer: A
Debit bad debt expense for $29,800; credit allowance for doubtful accounts for $29,800
To record the estimate of uncollectible accounts using the allowance method, the journal entry should debit bad debt expense and credit allowance for doubtful accounts. The calculated amount based on the aging of accounts receivable is $29,800.
A) Debit bad debt expense for $29,800; credit allowance for doubtful accounts for $29,800
This option is correct because it accurately reflects the necessary journal entry to account for the estimated uncollectible accounts. Given the calculations, $50,000 of the accounts receivable are overdue by 90 days with an estimated 50% uncollectible, equating to $25,000, and the remaining $50,000 under 30 days with an estimated 10% uncollectible amounts to $5,000. Thus, the total estimated uncollectible amount is $30,000. After factoring in the existing credit balance of $200, the adjustment needed is $29,800.
B) Debit bad debt expense for $29,800; credit accounts receivable for $29,800
This option is incorrect because it suggests crediting accounts receivable instead of the allowance for doubtful accounts. The allowance method specifically requires crediting the allowance account to reflect the estimated uncollectibles rather than reducing accounts receivable directly.
C) Debit bad debt expense for $30,200; credit allowance for doubtful accounts for $30,200
This option is incorrect as it miscalculates the amount needed for the adjustment. The total estimated uncollectible accounts should be $30,000, and after considering the existing credit balance of $200, the net adjustment should be $29,800, not $30,200.
D) Debit bad debt expense for $30,200; credit accounts receivable for $30,200
This option is incorrect because it also miscalculates the amount and incorrectly credits accounts receivable instead of the allowance for doubtful accounts. The correct entry should reflect an adjustment of $29,800 to the allowance account.
Conclusion
The correct choice, option A, properly accounts for the estimated uncollectible accounts by debiting bad debt expense and crediting the allowance for doubtful accounts with the appropriate adjustment of $29,800. All other options fail to represent the proper accounting treatment under the allowance method, either by miscalculating the necessary adjustment or by incorrectly crediting accounts receivable.