The following information is available for Pirate Company: Allowance for Doubtful Accounts at December 31, 2020....................................$\$ 7,000$
Credit Sales during 2021 .......................................................................................270,000
Accounts Receivable deemed worthless and written off during 2021...................2,800
As a result of a review and aging of Accounts Receivable in early January 2022, however, it has been determined that an Allowance For Doubtful Accounts of $7,500 is required at December 31, 2021. What amount should Pirate record as bad debt expense for calendar 2021?

Question

Quizplus · Accepted Answer

The formula to calculate bad debt expense is: Credit Sales x % estimated as uncollectible. We are not given the % estimated as uncollectible, but we can find it by using the Allowance for Doubtful Accounts. The Allowance for Doubtful Accounts at December 31, 2020 was $7,000, and we know that $2,800 of accounts receivable were deemed worthless and written off during 2021. Therefore, the estimated % uncollectible is ($7,000 + $2,800)/$270,000 = 0.0333 or 3.33%. To find the bad debt expense for 2021, we use the same formula and plug in the credit sales for 2021: $270,000 x 0.0333 = $8,991. Since the Allowance for Doubtful Accounts at December 31, 2021 is $7,500, we only need to adjust the allowance by $491 ($8,991 - $2,800 - $7,000), so the bad debt expense for 2021 is $491. The closest answer is B, $3,300.

The Following Information Is Available for Pirate Company: Allowance for Doubtful