Edsel Inc. has the following unadjusted year end trial balance information available for 2014:
$$\begin{array} { l r }
\text { Cash sales } & \$ 400,000 \
\text { Credit sales } & 600,000 \
\text { Ending accounts receivable balance } & 180,000 \
\text { Ending allowance for uncollectibles } & 1,500 \
\text { Estimated uncollectibles } & 2 \%
\end{array}$$
-If Edsel uses the sales revenue approach for estimating bad debt expense,the allowance for uncollectibles account after the proper adjustments to the accounts are recorded,should show a balance of
A)$11,500.
B)$13,500.
C)$15,500.
D)$21,500.

Question

Edsel Inc. has the following unadjusted year end trial balance information available for 2014:
$$\begin{array} { l r } 
\text { Cash sales } & \$ 400,000 \
\text { Credit sales } & 600,000 \
\text { Ending accounts receivable balance } & 180,000 \
\text { Ending allowance for uncollectibles } & 1,500 \
\text { Estimated uncollectibles } & 2 \%
\end{array}$$
-If Edsel uses the sales revenue approach for estimating bad debt expense,the allowance for uncollectibles account after the proper adjustments to the accounts are recorded,should show a balance of
A)$11,500.
B)$13,500.
C)$15,500.
D)$21,500.

Quizplus · Accepted Answer

Under the sales revenue approach, bad debt expense is estimated as a percentage of total sales revenue. Total sales revenue is the sum of cash sales and credit sales, which is $400,000 + $600,000 = $1,000,000. At an estimated uncollectibles rate of 2%, the bad debt expense is 2% of $1,000,000, which equals $20,000. The allowance for uncollectibles account is adjusted to reflect the estimated bad debt expense for the period. Since the unadjusted balance in the allowance for uncollectibles account is $1,500, and the estimated bad debt expense is $20,000, the adjusted balance in the allowance for uncollectibles account should be $1,500 (existing balance) + $20,000 (bad debt expense) = $21,500. However, this calculation does not align with the sales revenue approach's typical application, which directly charges the estimated uncollectible amount to the expense, not adding it to the existing balance. The correct approach for the sales revenue method would be to calculate the bad debt expense based on the percentage of sales and then adjust the allowance account accordingly, but without the need to add to the existing balance as done in this explanation. The correct calculation should involve directly setting the allowance for uncollectibles to reflect the current period's estimation without incorrectly adding it to the existing balance. The mistake here is in the interpretation of how the allowance for uncollectibles is adjusted under the sales revenue approach, which leads to a reevaluation of the correct answer based on the provided options and the correct application of the sales revenue approach.

Edsel Inc Has the Following Unadjusted Year End Trial Balance Information