Asked by Christopher Danger on Jul 27, 2024
Verified
A company uses the percent of sales method to determine its bad debts expense.At the end of the current year,the company's unadjusted trial balance reported the following selected amounts: All sales are made on credit.Based on past experience,the company estimates that 0.6% of net credit sales are uncollectible.What amount should be debited to Bad Debts Expense when the year-end adjusting entry is prepared?
A) $1,275
B) $1,775
C) $1,500
D) $1,080
E) $2,500
Percent of Sales Method
A forecasting approach where future amounts are estimated as a fixed percentage of sales.
Bad Debts Expense
An expense account that represents accounts receivable that a company does not expect to collect.
Unadjusted Trial Balance
A listing of all the accounts and their balances from the ledger, before any adjustments, used to check the arithmetic accuracy of bookkeeping.
- Utilize the revenue percentage method to determine the expected expense for bad debts.
Verified Answer
Net credit sales = Credit sales - Sales returns and allowances
Net credit sales = $330,000 - $22,000
Net credit sales = $308,000
Then, we need to calculate the estimated bad debts expense:
Estimated bad debts expense = Net credit sales x Percentage estimated to be uncollectible
Estimated bad debts expense = $308,000 x 0.6%
Estimated bad debts expense = $1,848
Since the company has a credit balance in its current bad debts expense account of $768, we only need to debit the difference between the estimated bad debts expense and the current balance:
Adjusting entry = Estimated bad debts expense - Current bad debts expense balance
Adjusting entry = $1,848 - $768
Adjusting entry = $1,080
Therefore, the correct answer is D) $1,080.
Learning Objectives
- Utilize the revenue percentage method to determine the expected expense for bad debts.
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