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:

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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