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An analysis of receivables estimates $8,000 of bad debt for the year. The Allowance for receivables already has a $600 credit balance carried over. What is the adjusting entry amount?
A$8,000
B$7,400
C$8,600
D$600
Answer & Solution
Correct answer: B. $7,400
1. Target closing allowance = $8,000 credit.
2. An existing $600 credit balance already sits in the account.
3. Adjustment = target - existing credit = $8,000 - $600 = $7,400.
4. $8,000 ignores the existing balance; $8,600 wrongly adds it; $600 is only the carryover. All wrong.
5. A $600 credit means the prior year overestimated bad debt, so less top-up is needed.
6. The credit of $7,400 lifts the account to its $8,000 target.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.4 "Allowance Method - Analysis of Receivables", p.142_
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