Allowance for Doubtful Accounts has a debit balance of $500 at the end of the year (before adjustment), and bad debt expense is estimated at 3% of credit sales. If credit sales are $893,000, the amount of the adjusting entry to record the estimate of the uncollectible accounts a. is $27,290 b. is $26,290 c. is $500 d. is $26,790

The correct answer is D

Explanation:

Computing the amount of estimate uncollectible accounts using the percentage of sales method which is as follows:

Bad debt expense amount = Credit Sales × % of credit sales

where

Credit Sales amounts to $893,000

% is 3%

Putting the values above:

Bad debt expense amount = $893,000 × 3%

Bad debt expense amount = $26,790

And the journal entry which is to be posted is as:

Bad Debt Expense A/cDr   $26,790

         Allowance for Doubtful Accounts A/cCr  $26,790

Note: The percentage of sales method does not consider the existing balance in the allowance for doubtful account.

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