On December 31,prior to adjustments,the balance of Accounts Receivable is $16,000 and Allowance for Doubtful Accounts has a credit balance of $95.The firm estimates its losses from uncollectible accounts to be 5% of accounts receivable at the end of the year.The adjusting entry needed to record the estimated losses from uncollectible accounts is made for
A) $705.
B) $800.
C) $895.
D) $95.

Question

Quizplus · Accepted Answer

To record the estimated losses, we need to create a debit entry in the Allowance for Doubtful Accounts and a credit entry in the Bad Debt Expense account. The estimated losses are 5% of the year-end Accounts Receivable balance, which is $16,000. Therefore, the estimated losses would be $800 ($16,000 x 0.05). However, we already have a credit balance of $95 in the Allowance for Doubtful Accounts, which means we only need to increase the allowance by the difference between the estimated losses and the current credit balance. So, the adjusting entry would be to debit Bad Debt Expense for $705 ($800 - $95) and credit Allowance for Doubtful Accounts for $705. Therefore, the correct answer is A) $705.

On December 31,prior to Adjustments,the Balance of Accounts Receivable Is