Exercise 8-5 The ledger of Costello Company at the end of the current year shows Accounts Receivable $110,000; Sales Revenue $840,000; and Sales Returns and Allowances $20,000. Prepare journal entries for each separate scenario below. (a) If Costello Company uses the direct write-off method to account for uncollectible accounts, journalize the entry at December 31, assuming Costello Company determines that L. Dole’s $1,400 balance is uncollectible. (b) If Allowance for Doubtful Accounts has a credit balance of $2,100 in the trial balance, journalize the adjusting entry at December 31, assuming uncollectible accounts are estimated to be 10% of accounts receivable. (c) If Allowance for Doubtful Accounts has a debit balance of $200 in the trial balance, journalize the adjusting entry at December 31, assuming uncollectible accounts are estimated to be 6% of accounts receivable.

Journal entries are shown below:

Explanation:

The journal entries are as follows

a.  Bad debt expense$1,400  

                       To Account receivable  $1,400

(Being the bad debt expense is recorded)

b. Bad debt expense  $8,900  

          To Allowance for doubtful accounts  $8,900

(Being the bad debt expense is recorded)

The computation is shown below:

= $110,000 × 10% - $2,100

= $11,000 - $2,100

= $8,900

c. Bad debt expense$6,800  

    To Allowance for doubtful accounts $6,800

(Being the bad debt expense is recorded)

The computation is shown below:

= $110,000 × 6% + $200

= $6,600 + $200

= $6,800

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