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Bad Debt Expense: Percentage of Credit Sales Method
Gilmore Electronics had the following data for a recent year:
Cash sales $135,000
Credit sales 512,000
The firm’s estimated rate for
Required:
1. Prepare the
2. Prepare the journal entry to record the estimate of bad debt expense.
3. If Gilmore had written off $3,000 of receivables as uncollectible during the year, how much would bad debt expense reported on the income statement have changed?
4. CONCEPTUAL CONNECTION If Gilmore’s estimate of bad debts is correct (2.2% of credit sales) and the gross margin is 20%, by how much did Gilmore’s income from operations increase assuming $150,000 of the sales would have been lost if credit sales were not offered?
(a)
Credit Sales Method:
The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.
The journal entry for recording the write-off of the uncollectible accounts.
Answer to Problem 66E
The adjusting entry for recording the write-off of the uncollectible accounts is recorded properly.
Explanation of Solution
The Gilmore Electronics has cash sales of
The journal entry for Gilmore Electronics is as follows:
| Date | Particulars | Debit ($) | Credit ($) |
| Allowance for Doubtful accounts.... Account Receivables........ (Record the entry of default payment) |
(b)
Credit Sales Method:
The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.
The adjusting journal entry for the bad debt expense.
Answer to Problem 66E
The adjusting entry for recording the bad debt expense is recorded properly.
Explanation of Solution
The Gilmore Electronics has cash sales of
The journal entry for Gilmore Electronics is as follows:
| Date | Particulars | Debit ($) | Credit ($) |
| Bad debt expense Allowance for Doubtful accounts.... (Record the entry of bad debt expense) |
(c)
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.
The effect of bad debt expense of
Answer to Problem 66E
There will no impact on the income statement on the income statement due to change in the bad debt expense.
Explanation of Solution
The Gilmore Electronics has cash sales of
The change in the amount of bad debt expense means change in the uncollectible account. Such change will not affect the profitability of the company which means there will be no impact on the income statement due to such change. This change only affects the allowance for doubtful accounts.
(d)
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 increase in the income from the sales due to providing the credit sales.
Answer to Problem 66E
There will be an increase in the income by
Explanation of Solution
The Gilmore Electronics has cash sales of
The net income when the credit sales are allowed with the estimation of bad debt of
Now, the net income when the credit sales are not allowed.
Thus, the increase in the income from credit policy is:
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