Sebastian Ltd. records uncollectible receivables using the allowance method, calculating the amount of the adjustment using the percentage of receivables approach. At the end of the financial year the balance of the Accounts Receivable account of Sebastian Ltd. is $78,000 debit, the balance of the Allowance for Bad Debts account is $1,000 credit and estimates that 2% of its receivables balance will be uncollectible. Record the adjusting entry. (Alternative: record the adjusting entry assuming the balance of the Allowance for Bad Debts account is $1,000 debit) (Alternative: record the adjusting entry using the percentage of sales approach, assuming net credit Sales Revenue was $78,000 and 2% of credit sales revenue will not be collected)

The Journal entries are as follows:

(i) Bad debt expense A/c Dr. $560

                To Allowance for Bad Debts $560

(To record the allowance for bad debts)

Workings:

Bad debt expense:

= (Accounts receivable × percent of its receivables uncollectible) - Allowance for Bad Debts(debit balance)

= ($78,000 × 2%) - 1,000

= $1,560 - $1,000

= $560

When $1,000 debit balance:

(ii) Bad debt expense A/c Dr. $2,560

                To Allowance for Bad Debts $2,560

(To record the allowance for bad debts)

Workings:

Bad debt expense:

= (Accounts receivable × percent of its receivables uncollectible) - Allowance for Bad Debts(debit balance)

= ($78,000 × 2%) + 1,000

= $1,560 + $1,000

= $2,560

Sales approach:

Bad debt expense A/c Dr. $1,560

                To Allowance for Bad Debts $1,560

(To record the Allowance for Bad Debts under sales approach)

Bad debt expense:

= 78,000 × 2%

= $1,560

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