Santana Rey, owner of Business Solutions, realizes that she needs to begin accounting for bad debts expense. Assume that Business Solutions has total revenues of $44,000 during the first three months of 2020 and that the Accounts Receivable balance on March 31, 2020, is $22,867. Required 1. Prepare the adjusting entry to record bad debts expense on March 31, 2020, under each separate assumption. There is a zero unadjusted balance in the Allowance for Doubtful Accounts at March 31. a. Bad debts are estimated to be 1% of total revenues. b. Bad debts are estimated to be 2% of accounts receivable. (Round to the dollar.) 2. Assume that Business Solutions’s Accounts Receivable balance at June 30, 2020, is $20,250 and that one account of $100 has been written off against the Allowance for Doubtful Accounts since March 31, 2020. If Rey uses the method in part 1b, what adjusting journal entry is made to recognize bad debts expense on June 30, 2020? 3. Should Rey consider adopting the direct write-off method of accounting for bad debts expense rather than one of the allowance methods considered in part 1? Explain.
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
Santana Rey, owner of Business Solutions, realizes that she needs to begin accounting for
debts
of 2020 and that the
1. Prepare the
assumption. There is a zero unadjusted balance in the Allowance for Doubtful Accounts at
March 31.
a. Bad debts are estimated to be 1% of total revenues.
b. Bad debts are estimated to be 2% of accounts receivable. (Round to the dollar.)
2. Assume that Business Solutions’s Accounts Receivable balance at June 30, 2020, is $20,250 and that
one account of $100 has been written off against the Allowance for Doubtful Accounts since March
31, 2020. If Rey uses the method in part 1b, what adjusting
debts expense on June 30, 2020?
3. Should Rey consider adopting the direct write-off method of accounting for bad debts expense rather
than one of the allowance methods considered in part 1? Explain.
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