A company has $80,000 in outstanding accounts receivable and it uses the allowance method to account for uncollectible accounts. Experience suggests that 6% of outstanding receivables are uncollectible. The current debit balance (before adjustments) in the allowance for doubtful accounts is $1,200. The journal entry to record the adjustment to the allowance account includes a debit to Bad Debts Expense for $6,000.

Question

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The adjustment to the allowance account involves increasing it by the estimated amount of uncollectible accounts. 6% of $80,000 is $4,800, so the allowance account should be increased by $3,600 ($4,800 - $1,200). This increase is debited to the allowance account and credited to Bad Debts Expense. Therefore, the journal entry would be:

Debit: Allowance for Doubtful Accounts $3,600
Credit: Bad Debts Expense $3,600

Since the question says that the journal entry includes a debit to Bad Debts Expense for $6,000, it is false.

A Company Has $80,000 in Outstanding Accounts Receivable and It