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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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Chapter
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BuyFindarrow_forward

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?

  1. (a) $3,000
  2. (b) $3,800
  3. (c) $2,200
  4. (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).

DateParticularsDebitCredit
 Bad debt expense$3,000 
    Allowance for doubtful accounts  $3,000
 (To adjust the allowance for doubtful accounts)  

Table (1)

Working note 1:

Calculate the bad debt expense.

  Bad debt expense = [Credit sales amount for the year×Estimated credit sales percentage]

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