Question

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 0.6% of credit sales to be uncollectible. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense

Answer 1

The complete question is:

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:

Accounts receivable $349,000 debit

Allowance for uncollectible accounts 660 debit

Net Sales 794,000 credit

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?

Answer:

A debit of $4,764 to Bad Debt Expense

Explanation:

When a company uses the percentage of sales approach to determine its bad debt expense, it uses an estimated percentage of net sales made to calculate it's debt expense.

In this case there was a net sales of $794,000.

Based on experience about 0.6% of sales are usually uncollectible

Estimated debt expense= Percentage loss * Net sales

Estimated debt expense= 0.006 * 794,000

Estimated debt expense= $4,764

The adjusting entry at year end will involve a debit of $4,764 to Bad Debt Expense