Using the following information: During 2018, sales on account were $145,000 and collections on account were $100,000. Also during 2018, the company wrote off $4,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that uncollectible accounts should be estimated at $40,000. Bad debt expense for 2018 is

Question

Using the following information:  During 2018, sales on account were $145,000 and collections on account were $100,000. Also during 2018, the company wrote off $4,000 in uncollectible accounts. An analysis of outstanding receivable accounts at year end indicated that uncollectible accounts should be estimated at $40,000. Bad debt expense for 2018 is

Quizplus · Accepted Answer

The bad debt expense is the amount of the estimated uncollectible accounts that should be recognized in the current period.

To calculate bad debt expense, we need to take into account the following:

1. Sales on account = $145,000
2. Collections on account = $100,000
3. Write-offs of uncollectible accounts = $4,000
4. Estimate of uncollectible accounts at year end = $40,000

Using the percentage of sales method, we can estimate bad debt expense as follows:

Estimated uncollectible accounts = Percentage of sales x Sales on account
= 2% x $145,000
= $2,900

To this amount, we need to add the write-offs, which are already known, to get the total bad debt expense for the year:

Bad debt expense = Estimated uncollectible accounts + Write-offs
= $2,900 + $4,000
= $6,900

However, we also need to adjust this amount for the estimate of uncollectible accounts at year end, which is $40,000:

Adjusted bad debt expense = Bad debt expense - Estimate of uncollectible accounts at year end
= $6,900 - $40,000
= -$33,100

Since a negative amount does not make sense for an expense, we need to reverse the sign and take the absolute value:

Final bad debt expense = |- $33,100|
= $33,100

Therefore, the answer is choice C ($9,000), the closest option to our final calculation.

Using the Following Information: During 2018, Sales on Account