At 30 June 2012,MPQ had a balance in accounts receivable of $500 000 and an allowance for doubtful debts of $40 000.It was decided to write off as irrecoverable a debt of X Ltd for $20 000.It was further decided that the allowance for doubtful debts should stand at 10% of accounts receivable.What was the DR side of the journal entry to bring the allowance for doubtful debts to the required level after writing off the debt of X Ltd?

Question

Quizplus · Accepted Answer

To bring the allowance for doubtful debts to the required level after writing off the debt of X Ltd, we need to calculate the new balance of the allowance.

10% of accounts receivable = 10% of $500,000 = $50,000

Current balance of allowance for doubtful debts = $40,000

Required increase in allowance for doubtful debts = $50,000 - $40,000 = $10,000

The journal entry will be:

DR Allowance for Doubtful Debts $10,000 
CR Bad Debts Expense $10,000

However, since we also need to write off an irrecoverable debt of $20,000, the total amount to be debited to the Bad Debts Expense account will be:

$10,000 (to bring the allowance to the required level) + $20,000 (irrecoverable debt) = $30,000

Therefore, the correct answer is C) DR doubtful debts expense $28 000.

At 30 June 2012,MPQ Had a Balance in Accounts Receivable