Question

Haven Company uses the percentage of sales method for recording bad debts expense. For the year, cash sales are $600,000 and credit sales are $2,200,000. Management estimates that 1% is the sales percentage to use. What adjusting entry will Haven Company make to record the bad debts expense?
a. Bad Debts Expense 28,000
Allowance for Doubtful Accounts 28,000
b. Bad Debts Expense 28,000
Accounts Receivable 28,000
c. Bad Debts Expense 22,000
Allowance for Doubtful Accounts 22,000
d. Bad Debts Expense 22,000
Accounts Receivable 22,000

Answer 1

Answer:

c.

Bad Debts Expense 22,000

Allowance for Doubtful Accounts 22,000

Explanation:

Haven uses the percentage of sales method for recording bad debts expense. Under this method bad debts expense is calculated as percentage of credit sales of the period. Cash sales are ignored. Bad debts expense is calculated by the formula:

Bad Debts Expense = Estimated % × Credit Sales

= 1% x $2,200,000 = $22,000

The company will make adjusting entry below:

Debit Bad Debts Expense $22,000

Credit Allowance for Doubtful Accounts $22,000