Question
Riverside Wholesale estimates bad debts as a percentage of net credit sales.
| Date | Event |
|---|
| December 31, 2025 | Net credit sales for the year were $800,000. Bad debts are estimated at 1% of net credit sales. |
| February 20, 2026 | The $1,200 account of a customer, Halloran Bros., was determined to be uncollectible and written off. |
Required: Prepare the December 31, 2025 adjusting entry to record bad debt expense, and the February 20, 2026 entry to write off the Halloran Bros. account.
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
IFRS 9 — expected credit losses
The allowance is an estimate of receivables that will not be collected, recognised before any specific account is known to have failed. Keep the two mechanics apart: setting or adjusting the allowance affects profit, whereas writing a specific account off against an existing allowance does not.
Common mistakes
- Recording the full estimate as the expense when the allowance already carries a balance — under the balance-sheet approach the entry is the movement needed, not the target.
- Taking a write-off of a specific debt to expense a second time when an allowance already exists.
- Reducing the receivable directly and leaving no allowance account, which loses the gross amount.