Mazie Supply Co. uses the percent of accounts receivable method. On December 31, it has outstanding accounts receivable of $123,500, and it estimates that 3% will be uncollectible. Prepare the year-end adjusting entry to record bad debts expense under the assumption that the Allowance for Doubtful Accounts has: (a) a $2,100 credit balance before the adjustment. (b) a $618 debit balance before the adjustment

a. Before adjusting, the Allowance for Doubtful Accounts has a $2,100 credit balance.

Debit Bad debts expense $1,605

Credit Allowance for Doubtful Accounts $1,605

b. Before adjusting, the Allowance for Doubtful Accounts has a $618 debit balance.

Debit Bad debts expense $4,323

Credit Allowance for Doubtful Accounts $4,323

Explanation:

Mazie Supply Co. uses the percent of accounts receivable method. It estimates that 3% will be uncollectible.

Estimated uncollectible =  3% x $123,500 = $3,705

a. Before adjusting, the Allowance for Doubtful Accounts has a $2,100 credit balance.

Bad debts expense = $3,705 - $2,100 = $1,605

The year-end adjusting entry:

Debit Bad debts expense $1,605

Credit Allowance for Doubtful Accounts $1,605

b. Before adjusting, the Allowance for Doubtful Accounts has a $618 debit balance

Bad debts expense = $3,705 + $618 = $4,323

The year-end adjusting entry:

Debit Bad debts expense $4,323

Credit Allowance for Doubtful Accounts $4,323

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