Chapter 16, Problem 3MC

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

Chapter
Section

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

A business has an ending balance in Accounts Receivable of $35,000; credit sales for the year of$300,000; and a credit balance in Allowance for Doubtful Accounts of $800. If the percentage of sales method is used and the percentage is estimated at 1% of credit sales, what is the ending balance in Allowance for Doubtful after the adjusting entry? (a)$3,000 (b) $3,800 (c)$2,200 (d) $1,150 To determine Find the correct option, the option that indicates the ending balance in allowance for doubtful accounts after the adjusting entry. Explanation Percentage of sales method: Credit sales are recorded by debiting (increasing) accounts receivable account. The bad debts is a loss incurred out of credit sales, hence uncollectible accounts can be estimated as a percentage of credit sales or total sales. It is a method of estimating the bad debts (expected loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of net credit sale (or total sales) for a specific period. Under percentage of sales method, estimated bad debts would be treated as a bad debt expense of the particular period. Record the adjusting entry for allowance for doubtful accounts having a credit balance (using percentage of sales method).  Date Particulars Debit Credit Â Bad debt expense$3,000 Â Â Â Â  Allowance for doubtful accounts Â \$3,000 Â (To adjust the allowance for doubtful accounts) Â Â

Table (1)

Working note 1:

â€‚Â BadÂ debtÂ expenseÂ =Â [CreditÂ salesÂ amountÂ forÂ theÂ yearÃ—EstimatedÂ creditÂ salesÂ percentage]

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