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14 November, 07:37

Lani Co. uses the allowance method to account for bad debts. At the end of 2010, there unadjusted trial balance shows an accounts receivable balance of $400,000; allowance for doubtful accounts balance of $400 (debit); and sales of $1,200,000. Based on history, Lani estimates that bad debts will be 1% of accounts receivable. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of:

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  1. 14 November, 09:41
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    The bad debt expense amount to $4,400

    Explanation:

    Bad debt expense is the expense which is not recovered by the business in the future.

    The amount of bad debt expense would be computed as:

    Bad debt expense = 1% of Accounts receivable + Debit balance of allowance for doubtful accounts

    where

    Accounts receivable is $400,000

    Debit balance of allowance for doubtful accounts is $400

    Putting the values above:

    Bad debt expense = $400,000 * 1% + $400

    = $4,000 + $400

    = $4,400
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