26. As of December 31, Company A has total sales of $50,000, of which $7,500 is the accounts receivable balance. The manager estimates that 20% of the accounts receivable balance will be uncollectible. Which journal entry records the estimated uncollectible using the allowance method?
Answer: C
Debit bad debt expense for $1,500; credit allowance for doubtful accounts for $1,500
The journal entry to record the estimated uncollectible accounts using the allowance method involves debiting bad debt expense and crediting allowance for doubtful accounts for the estimated amount. In this case, since the accounts receivable balance is $7,500 and 20% of that is estimated to be uncollectible, the amount recorded is $1,500.
A) Debit allowance for doubtful accounts for $2,500; credit bad debt expense for $2,500
This option incorrectly suggests a debit to the allowance for doubtful accounts and a credit to bad debt expense for $2,500. The amounts are miscalculated; the estimated uncollectible amount is $1,500, not $2,500, making this entry incorrect.
B) Debit allowance for doubtful accounts for $1,500; credit bad debt expense for $1,500
This option also incorrectly debits the allowance for doubtful accounts instead of debiting bad debt expense. The allowance for doubtful accounts should be credited, and bad debt expense should be debited for the estimated uncollectible amount of $1,500.
C) Debit bad debt expense for $1,500; credit allowance for doubtful accounts for $1,500
This option accurately reflects the allowance method of accounting for uncollectible accounts. By debiting bad debt expense and crediting allowance for doubtful accounts for $1,500, it correctly records the estimated uncollectible amount based on the manager's estimate of 20% of the accounts receivable balance.
D) Debit bad debt expense for $2,500; credit allowance for doubtful accounts for $2,500
This option is incorrect because it overstates the estimated uncollectible amount at $2,500 instead of the correct amount of $1,500. The entry does not align with the 20% estimate of the accounts receivable balance.
Conclusion
The correct entry is to debit bad debt expense for $1,500 and credit allowance for doubtful accounts for $1,500, as it accurately reflects the estimated uncollectible accounts based on the total accounts receivable. All other options either miscalculate the uncollectible amount or incorrectly structure the journal entry, failing to adhere to the proper accounting treatment for estimating bad debts.