Gowns, Inc.uses the percentage of sales basis to estimate its bad debts.For the year ended December 31, 2011, Gowns' total sales are €900,000.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 €1,050.The Accounts Receivable balance at December 31, 2011 is €79,200.The entry to record bad debt expense at December 31, 2011 will impact the statement of financial position by

Question

Quizplus · Accepted Answer

To record bad debt expense, we need to calculate the estimated amount of uncollectible accounts based on sales.

1% of credit sales = 1% x €900,000 = €9,000

The existing balance in the Allowance for Doubtful Accounts is a debit balance of €1,050, which means we have overestimated bad debt in the past.

To adjust the balance to reflect the estimated bad debt expense for the current year, we need to increase the allowance by the difference between the estimated and existing balances:

€9,000 - €1,050 = €7,950

Therefore, the entry to record bad debt expense at December 31, 2011 will increase the Allowance for Doubtful Accounts by €7,950.