At the end of the current year Accounts Receivable has a bal

At the end of the current year, Accounts Receivable has a balance of $550,000; Allowance for Doubtful Accounts has a credit balance of $5,500; and sales for the year total $2,500,000.  An analysis of receivables estimates uncollectible receivables as $25,000.

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Determine (a) the amount of the adjusting entry for bad debt expense; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.

Solution

a) The Allowance for doubtful debts should have a credit balance of $25,000 because estimated uncollectible receivables is $25,000. The current credit balance of allowance for doubtful debts is $5,500. Therefore the adjusting entry for bad debt expense will be of $19,500 ($25,000 - $5,500). The adjusting Journal entry is shown as follows:-

Bad debt expense Dr. 19,500

Allowance for doubtful debts 19,500

b) Adjusted balance of Accounts Receivable = $550,000

Adjusted balance of allowance for doubtful debts = $5,500+$19,500 = $25,000

Bad debt expense = $19,500

c) Net realizable value of accounts receivable = Accounts Receivable - Allowance for doubtful debts

= $550,000 - $25,000 = $525,000