A company sells a particular product only in the last month of its fiscal year.The company uses commission agents for such sales and pays them 6% of their net sales 30 days after the sales are made.The agents' sales were $10 million.Experience indicates that 10% of the sales are usually not collected and 2% are returned in the first month of the new year.The auditor would expect the year-end balance in the accrued commissions payable account to be
A) $528,000.
B) $540,000.
C) $588,000.
D) $600,000.
$10,000,000 × 98% = $9,800,000 Net Sales × 6% commission percentage = $588,000 estimated accrued commissions payable.

Question

Quizplus · Accepted Answer

The estimated accrued commissions payable can be calculated as follows: 
Net Sales = $10,000,000 x 98% = $9,800,000 
Commission payable = $9,800,000 x 6% = $588,000 
Since the commission agents are paid 30 days after the sales are made, this amount will be accrued as a liability on the balance sheet. The auditor should also consider the fact that 10% of the sales may not be collected and 2% may be returned, which would reduce the amount of commissions payable. However, since no information is given about how these returns and uncollected amounts would affect the commission payable, we will assume they have no impact on the estimated amount. Therefore, the year-end balance in the accrued commissions payable account should be approximately $588,000. Therefore, the best choice is C.

A Company Sells a Particular Product Only in the Last