Craigmont uses the allowance method to account for uncollectible accounts. Its year-end unadjusted trial balance shows Accounts Receivable of $134,500, allowance for doubtful accounts of $965 (credit) and sales of $1,075,000. If uncollectible accounts are estimated to be 0.5% of sales, what is the amount of the bad debts expense adjusting entry?

The answer is $5,375

Explanation:

Bad debt expense is the expense that is recognized when it is certain that an account receivable will not be collected again due to a customer's bankruptcy. Bad debt expense reduces the accounts receivable.

The allowance method to account for uncollectible accounts is by taking the estimated percentage of what has been determined to be uncollectible from the total sales.

Sales = $1,075,000

Estimation of uncollectible accounts = 0.5% or 0.005

Therefore, the amount of the bad debts expense to be recognized is:

0.005 x $1,075,000

$5,375

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