At each calendar year-end, Mazie Supply Co. uses the percent of accounts receivable method to estimate bad debts. On December 31, 2017, it has outstanding accounts receivable of $140,500, and it estimates that 4% will be uncollectible. Prepare the adjusting entry to record bad debts expense for year 2017 under the assumption that the Allowance for Doubtful Accounts has: (a) a $2,389 credit balance before the adjustment. (b) a $703 debit balance before the adjustment.

Explanation:

The journal entries are shown below:

a. Bad debt expense Dr  $3,231

      To Allowance for doubtful debts  $3,231

(Being the bad debt is recorded)

It is computed below:

= $140,500 × 4% - $2,389

= $3,231

b. Bad debt expense Dr  $3,231

      To Allowance for doubtful debts  $3,231

(Being the bad debt is recorded)

It is computed below:

= $140,500 × 4% + $703

= $6,323

(a) when insurance is obtained through a reciprocal insurer, the insureds are sharing the risk of loss with other subscribers of that reciprocal.

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