During the year,Spirit Fun had net credit sales of $500,000.Past experience shows that 1.5 percent of the firm's net credit sales result in uncollectible accounts.Determine the adjusting entry needed to recognize the estimated expense for these uncollectible accounts.
A) debit Allowance for Doubtful Accounts $7,500 and credit Accounts Receivable $7,500.
B) debit Uncollectible Accounts Expense $7,500 and credit Accounts Receivable $7,500.
C) debit Uncollectible Accounts Expense $7,500 and credit Allowance for Doubtful Accounts $7,500.
D) debit Uncollectible Accounts Expense $75,000 and credit Allowance for Doubtful Accounts $75,000.

Question

Quizplus · Accepted Answer

The adjusting entry needed to recognize the estimated expense for uncollectible accounts is to debit Uncollectible Accounts Expense and credit Allowance for Doubtful Accounts. This will increase the expense and decrease the asset by the same amount, resulting in a more accurate representation of the financial statements. Option A is incorrect because it directly reduces the Accounts Receivable account which is not appropriate as it is only an estimation at this stage. Option B and D are incorrect because they incorrectly account the expense for uncollectible accounts without setting up the allowance account.

During the Year,Spirit Fun Had Net Credit Sales of $500,000