A company uses the percent of sales method to determine its bad debts expense.At the end of the current year,the company's unadjusted trial balance reported the following selected amounts: All sales are made on credit.Based on past experience,the company estimates that 0.6% of credit sales are uncollectible.What amount should be debited to Bad Debts Expense when the year-end adjusting entry is prepared?
A)$1,275
B)$1,775
C)$4,500
D)$4,800
E)$5,500

Question

A company uses the percent of sales method to determine its bad debts expense.At the end of the current year,the company's unadjusted trial balance reported the following selected amounts:  All sales are made on credit.Based on past experience,the company estimates that 0.6% of credit sales are uncollectible.What amount should be debited to Bad Debts Expense when the year-end adjusting entry is prepared?
A)$1,275 
B)$1,775 
C)$4,500 
D)$4,800 
E)$5,500

Quizplus · Accepted Answer

First, we need to calculate the company's estimated credit sales for the year. We can do this by multiplying the total sales by the percentage of sales that are made on credit:

$800,000 x 80% = $640,000

Next, we need to apply the estimated uncollectible percentage to the estimated credit sales:

$640,000 x 0.6% = $3,840

So, the company's estimated bad debts expense for the year is $3,840. However, we need to debit this amount to Bad Debts Expense and credit it to Allowance for Doubtful Accounts. Since the unadjusted trial balance doesn't include an allowance account, we need to calculate the necessary adjustment to create one.

We know that the ending balance in Allowance for Doubtful Accounts should be equal to the estimated uncollectible amount. Since the unadjusted trial balance reports a credit balance in Accounts Receivable of $200,000, we can calculate the necessary debit to Allowance for Doubtful Accounts as:

$200,000 - $3,840 = $196,160

So, the adjusting entry should be:

Debit: Bad Debts Expense $3,840
Credit: Allowance for Doubtful Accounts $3,840

Therefore, the answer is D, $4,800.

A Company Uses the Percent of Sales Method to Determine