Waterway Industries uses the percentage-of-receivables basis to record bad debt expense and concludes that 3% of accounts receivable will become uncollectible. Accounts receivable are $396,800 at the end of the year, and the allowance for doubtful accounts has a credit balance of $3,043. (a) Prepare the adjusting journal entry to record bad debt expense for the year. (b) If the allowance for doubtful accounts had a debit balance of $951 instead of a credit balance of $3,043, prepare the adjusting journal entry for bad debt expense.

Journal entries

(a)

Dr. Bad Debt Expense $8,861

Cr. Allowance for Doubtful Accounts $8,861

(b)

Dr. Bad Debt Expense $12,855

Cr. Allowance for Doubtful Accounts $12,855

Explanation:

Bad debt Expense will be calculated using the percentage of debt loss. The expense will be calculated using the account receivable balance.

Closing Value of the Allowance for Doubtful Accounts will be as follow

Closing Balance = $396,800 x 3% = $11,904

(a)

As Allowance for Doubtful Accounts already have credit balance of $3,043, we need to adjust the remainder to make the closing balance of Allowance for Doubtful Accounts $11,904 at the year end.

Adjustment Value = $11,904 - $3,043 = $8,861

(b)

As Allowance for Doubtful Accounts already have debit balance of $951 we need to adjust the remainder to make the closing balance of Allowance for Doubtful Accounts $11,904 at the year end.

Adjustment Value = $11,904 + $951 = $12,855