Scott's Plumbing Company uses the allowance method and uses the percent of credit sales method of estimating uncollectible accounts expense. Based on past history and industry averages, ¾% of credit sales are expected to be uncollectible. The Company recorded $3,500,000 of credit sales and $1,000,000 in cash sales during the year. At December 31, the balance of accounts receivable was $250,000 and the allowance for doubtful accounts had a credit balance of $3,500.

Dr Bad debt expense 22,750

Cr Allowance for doubtful accounts 22,750

Explanation:

Scott's Plumbing sold $3,500,000 on account, and it estimates that 0.75% of that amount will be bad debt.

total bad debt expense for the year = $3,500,000 x 0.75% = $26,250

by December 31, the company had a credit balance of $3,500 in allowance for doubtful accounts, so it was $26,250 - $3,500 = $22,750 short

The adjusting entry should be:

December 31, adjustment of bad debt expense and accounts receivable:

Dr Bad debt expense 22,750

Cr Allowance for doubtful accounts 22,750

At the year end the Allowance for Doubtful accounts will have a debit balance of $3,500,000-$ 2625000=$ 625000

Required Adjustment in the Allowance for doubtful accounts = $ 2621500

Explanation:

Scott's Plumbing Company

¾% of credit sales are expected to be uncollectible

Allowance for doubtful accounts=¾% of $3,500,000 = $ 2625000

Allowance for doubtful accounts = $3,500 Credit

Required Adjustment in the Allowance for doubtful accounts = $ 2621500

Credit Sales $3,500,000

Accounts receivable $250,000

Bad Debts $ 3250000

At the year end the Allowance for Doubtful accounts will have a debit balance of $3,500,000-$ 2625000=$ 625000