Allowance Method of Accounting for Bad DebtsComparison of the Two Approaches

Kandel Company had the following data available for 2017 (before making any adjustments):

Accounts receivable, 12/31/17		$320,100
Allowance for doubtful accounts		2,600
Net credit sales, 2017		834,000

Required:

1. Identify and analyze the adjustment to recognize bad debts under the following assumptions: (a) bad debts expense is expected to be 2% of net credit sales for the year.

How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.

(b) Kandel expects it will not be able to collect 6% of the balance in accounts receivable at year-end.

2. Assume instead that the balance in the allowance account is a negative $2,600. How will this affect your answers to part (1)?

(a) bad debts expense is expected to be 2% of net credit sales for the year.

(b) Kandel expects it will not be able to collect 6% of the balance in accounts receivable at year-end.

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