[ramo10]

I was doing a question in a text book, and I think there is a typo for the answer choices. Ill post it here if someone can please explain if im making an error somewhere.

The question is:

X accounts for its bad debts using the allowance method. On Dec 31, the company had gross accounts receivable recorded on its books of 200,000. On that date, the allowance for bad debt accounts had a credit balance of 22,000. During the year, the company had 500,000 in sales. Bad debts are calculated as 5% of outstanding accounts receivable. What entry needs to be made to the allowance for bad debts account to record this information.

The choices it gives are:

-A credit entry for 10,000

-A debit entry for 32,000

-A credit entry for 25,000

-A credit entry for 32,000

The answer is listed as the second one (Debit entry for 32,000), but it should be Debit for 12,000 right? Since the allowance account already has a credit balance of 22,000 and the calculated allowance is 0.05*200,000 = 10,000 this should be the amount of the credit balance of the allowance account. So, to get a credit balance of 10,000 we would need to debit for 12,000. Im not sure if i am doing something wrong, or if the question has an error, could someone please help.

[mla1169]

To get from a credit balance of ($22k) to a debit balance of $10k, you need to enter a $32k debit. A $22k debit would get the balance to 0, then you want an additional $10k.

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[ramo10]

But, isnt the allowance that we calculate the balance that is needed to be on the credit side of the allowance account, since the normal balance for the account is credit

[J]

Yes ramo10; that is correct. Unless I missed something, it looks like a typo. The Percent of Receivables method estimates the ending balance of the Allowance account (with a normal balance of a credit). In this case, 200,000 * 0.05 = 10,000, which means you should have a credit balance of 10,000. If you have a credit balance of 22,000 before adjusting, you would need to debit Allowance for 12,000.

My guess is that the question intended for you to have a 22,000 debit balance before the adjustment for BDE. In that case, you would debit BDE and credit Allowance for 32,000.

[Author]

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