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An analysis of receivables estimates $8,000 of bad debt for the year. The Allowance for receivables carries a $600 debit balance from last year. What is the adjusting entry amount?
A$7,400
B$8,000
C$600
D$8,600
Answer & Solution
Correct answer: D. $8,600
1. Target closing allowance = $8,000 credit.
2. A $600 debit balance is the wrong side, so the account is $600 below zero.
3. To reach $8,000 credit, the credit needed = $8,000 + $600 = $8,600.
4. A debit balance means the prior year underestimated bad debt, so more top-up is needed.
5. $7,400 would be right for a $600 credit, not a debit; $8,000 ignores the balance.
6. $600 is merely the carryover, not the adjustment. The correct figure is $8,600.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.4 "Allowance Method - Analysis of Receivables", p.143_
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