Nichols Company uses the percentage of receivables method for recording bad debts expense. The accounts receivable balance is $250000 and credit sales are $1000000. Management estimates that 4% of accounts receivable will be uncollectible. What adjusting entry will Nichols Company make if the Allowance for Doubtful Accounts has a credit balance of $2500 before adjustment

Dr. Bad Debt Expense $7,500

Cr. Allowance for Doubtful Accounts $7,500

Explanation:

Bad debt Expense will be calculated using the percentage of debt loss. The expense will be calculated using the account receivable balance.

Estimated Bad Debt = Account receivable balance x Rate of bad Debt loss = $250,000 x 4% = $10,000

As Allowance for Doubtful Accounts already have balance of $2,500, we need to adjust the remainder to make the closing balance of Allowance for Doubtful Accounts $22,200 at the year end.

Adjustment required = $10,000 - $2,500 = $7,500