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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Give two examples of adjusting entries to record estimated items. Include in one example a discussion of how straight-line depreciation expense is computed.

To determine

Write two examples of adjusting entries to record the estimated items.

Explanation

Adjusting entries: Adjusting entries are those entries which are recorded at the end of the year, to update the income statement accounts (revenue and expenses) and balance sheet accounts (assets, liabilities, and stockholders’ equity) to maintain the records according to accrual basis principle.

Example 1: Estimation of bad debts: Assume a company adopts a policy of providing allowance for bad debt losses that is equal to 2% of net sales. In the current year, the company has net sales of $200,000. Record the adjusting entry.

DateAccount title and explanationDebit ($)Credit ($)
December 31Bad debt expense4,000 
 Allowance for bad and doubtful accounts 4,000
 (To record the adjusting entry for estimation of bad debts)  

Table (1)

Working note (1):

Calculate the bad debt expense:

Bad debts expense=Net sales×Percentage of net sales=$200,000×2100=$4,000

  • Bad debts expense is an expense account and it decreases the value of the shareholders’ equity. Thus, debit bad debts expense with $4,000.
  • Allowance for bad and doubtful accounts is contra-asset account and it decreases the value of the asset. Thus, credit allowance for bad and doubtful accounts with $4,000.

Example 2: Estimation of depreciation expense: Assume that on July 1 of the current year, a company purchased certain office equipment for $30,000, which is estimated to have a useful life of 10 years and a residual value of $600

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