TechCom has $40,000 in outstanding accounts receivable. Past experience suggests that 5% of outstanding receivables are uncollectible. The current balance in the allowance for doubtful accounts is $2,500 debit. The required adjusting journal entry includes a debit to bad debt expense for $4,500.

Question

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The adjusting journal entry for the estimated uncollectible accounts is calculated as 5% of $40,000, which is $2,000. The current balance in the allowance for doubtful accounts is $2,500 debit, indicating that more has been set aside than is required based on the estimate. Therefore, to bring the balance to the required level, a credit of $500 is needed. The adjusting journal entry will be:
Debit Bad Debt Expense $4,500
Credit Allowance for Doubtful Accounts $500
This will result in a net increase in the allowance for doubtful accounts of $4,000 ($2,500 - $500 + $4,000 = $6,000).

TechCom Has $40,000 in Outstanding Accounts Receivable