Pharoah Company uses the percentage-of-receivables method for recording bad debt expense. The Accounts Receivable balance is $440000 and credit sales are $1760000. Management estimates that 6% of accounts receivable will be uncollectible. What adjusting entry will Pharoah Company make if the Allowance for Doubtful Accounts has a credit balance of $4400 before adjustment?

The multiple choices are as follows;

A. Bad Debt Expense 22000

Allowance for Doubtful Accounts 22000

B. Bad Debt Expense 30800

Allowance for Doubtful Accounts 30800

C. Bad Debt Expense 17600

Accounts Receivable 17600

D. Bad Debt Expense 8800

Allowance for Doubtful Accounts 8800

A is the correct option, Bad Debt Expense 22000

Allowance for Doubtful Accounts 22000

Explanation:

The current year's allowance for doubtful accounts is computed thus:

allowance for doubtful accounts=$440,000*6%

=$26,400

However, the allowance for doubtful account already has an opening credit balance of $4,400 that must be deducted from the new allowance of $26,400, the remainder amount is $22,000 ($26,400-$4,400), which would be debited to bad debt expense account since an increase in expense s a debit entry in expense account and credited to allowance for doubtful accounts.