Gowns, Inc. uses the percentage of sales basis to estimate its bad debts. For the year ended December 31, 2014, Gowns' total credit sales are €1,500,000. Management of the company estimates that 1% of credit sales will become uncollectible. The existing balance in the Allowance for Doubtful Accounts is a debit balance of €1,750. The Accounts Receivable balance at December 31, 2014 is €132,000. The entry to record bad debt expense at December 31, 2014 will impact the statement of financial position by

Question

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The bad debt expense is calculated by multiplying the credit sales by the estimated percentage of uncollectible accounts, which is 1% in this case. Therefore, the bad debt expense for Gowns, Inc. for the year ended December 31, 2014 would be:

Bad debt expense = Credit sales x Estimated percentage of uncollectible accounts
Bad debt expense = €1,500,000 x 1%
Bad debt expense = €15,000

Since the existing balance in the Allowance for Doubtful Accounts is a debit balance of €1,750, we need to increase the allowance by €13,250 (€15,000 - €1,750) to account for the expected bad debts. Therefore, the entry to record bad debt expense at December 31, 2014 will impact the statement of financial position by increasing the Allowance for Doubtful Accounts by €13,250.