On December 31, prior to adjustments, the balance of Accounts Receivable is $56,000 and Allowance for Doubtful Accounts has a debit balance of $1,200. The firm estimates its losses from uncollectible accounts to be 4% of accounts receivable at the end of the year. The adjusting entry needed to record the estimated losses from uncollectible accounts is

Question

Quizplus · Accepted Answer

To calculate the estimated losses from uncollectible accounts, we need to multiply the ending balance of accounts receivable by the estimated percentage of losses. Thus, the estimated losses are: 
$56,000 x 4% = $2,240

Since the Allowance for Doubtful Accounts currently has a debit balance of $1,200, we need to increase it by the estimated losses of $2,240 to have a balance that represents the total estimated uncollectible accounts. Therefore, the adjusting entry needed is:
Debit: Bad Debt Expense $2,240
Credit: Allowance for Doubtful Accounts $2,240

The other answer choices do not reflect the necessary adjustment to the allowance account and/or the estimated losses.

On December 31, Prior to Adjustments, the Balance of Accounts