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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Percentage of Credit Sales Method

Ruby Red manufactures, markets, and distributes citrus flavored soft drinks across the globe. Ruby Red hired a collection agency in 2018 to increase collection rates from customers. As a result, Ruby estimates that only 2% of its 2019 credit sales will be written off, compared to the 4% of 2018’s credit sales that were estimated to be uncollectible. At December 31, 2019, Ruby Red has a $12,800 credit balance in its allowance for doubtful accounts and credit sales of $1,570,000.

Required:

Use the percentage of credit sales method to calculate the bad debt expense.

To determine

Credit Sales Method:

The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.

To calculate:

The bad debt expense under the method.

Explanation

The credit sales given in the question is $15,70,000 and the percentage of bad debts on the sales is 2%.

So, the bad debt expense to be recognised:

Bad Debt Expense=Sales amount×Percentage of bad debt

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