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 $45,000 during the first three months of 2020, and that the Accounts Receivable balance on March 31, 2020, is $22,817. Required: 1a. Prepare the adjusting entry to record bad debts expense, which are estimated to be 2% of total revenues on March 31, 2020. There is a zero unadjusted balance in the Allowance for Doubtful Accounts at March 31. 1b. Prepare the adjusting entry to record bad debts expense, which are estimated to be 3% of accounts receivable on March 31, 2020. There is a zero unadjusted balance in the Allowance for Doubtful Accounts at March 31. 2. Assume that Business Solutions's Accounts Receivable balance at June 30, 2020, is $21,200 and that one account of $85 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

Business Solutions

Journal Entries

1a.   Bad debts expense                             Debit             $ 900

      Allowance for Doubtful accounts       Credit                           $ 900

To record bad debts expenses at 2 % of revenues

1b.   Bad debts expense                             Debit             $ 685

      Allowance for Doubtful accounts       Credit                           $ 685

To record bad debts expenses at 3 % of receivables

2.   Bad debts expense                             Debit             $     36

      Allowance for Doubtful accounts       Credit                           $    36

To record adjustment of bad debts expenses at 3 % of receivables          

Explanation:

Computation of bad debts expenses

2 % of revenues

Total Revenues for the quarter                                                 $ 45,000

Bad debts expenses as % of revenues                  

2 % * $ 45,000                                                                           $       900

3 % of receivables as at March 31

Total receivable balance as at March 31 2020                         $ 22,817

Bad debts expense as % of receivables

3 % * $ 22,817                                                                               $     685

3 % of receivables as at June 30

Total receivable balance as at June 30 2020                         $ 21,200

Required Allowance for Doubtful accounts  as % of receivables

3 % * $ 21,200                                                                               $     636

Available balance March 31 2020                                             $      685

Balance written off                                                                     $ (      85)

Available balance June 30 2020                                                $   600

Required balance as computed above                                       $   636

Adjusting entry for bad debts expenses                                     $    36

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