Acme Company has credit sales of $3.10 million for year 2013.Accounts Receivable total $947,360 and the company estimates that 2% of accounts receivable will remain uncollectible.Historically,.9% of sales have been uncollectible.On December 31,2013,the company's Allowance for Doubtful Accounts has an unadjusted credit balance of $2,575.Acme prepared a schedule of its December 31,2013,accounts receivable by age.Based on past experience,it estimates the percent of receivables in each age category that will become uncollectible.This information is summarized here: Assuming the company uses the percent of accounts receivable method,what is the amount that Acme will enter as the Bad Debt Expense in the December 31 adjusting journal entry?
A)$18,947.20
B)$16,372.20
C)$23,024.40
D)$27,900.00
E)$21,522.20

Question

Acme Company has credit sales of $3.10 million for year 2013.Accounts Receivable total $947,360 and the company estimates that 2% of accounts receivable will remain uncollectible.Historically,.9% of sales have been uncollectible.On December 31,2013,the company's Allowance for Doubtful Accounts has an unadjusted credit balance of $2,575.Acme prepared a schedule of its December 31,2013,accounts receivable by age.Based on past experience,it estimates the percent of receivables in each age category that will become uncollectible.This information is summarized here:  Assuming the company uses the percent of accounts receivable method,what is the amount that Acme will enter as the Bad Debt Expense in the December 31 adjusting journal entry?
A)$18,947.20 
B)$16,372.20 
C)$23,024.40 
D)$27,900.00 
E)$21,522.20

Quizplus · Accepted Answer

First, we need to calculate the estimated amount of uncollectible accounts using both the aging method and the percentage of sales method.

Aging Method:

Current - 0-30 days: $353,840 x 1.5% = $5,307.60 
31-60 days: $245,040 x 6% = $14,702.40 
61-120 days: $225,600 x 20% = $45,120 
Over 120 days: $123,880 x 50% = $61,940

Total estimated uncollectible accounts: $127,070

Percentage of Sales Method:

Credit sales x historical uncollectible percentage = $3.10 million x 0.9% = $27,900

Next, we need to determine the adjusting entry for the allowance for doubtful accounts.

Current balance of allowance for doubtful accounts: $2,575 
Add: Estimated uncollectible accounts using aging method: $127,070 
Less: Estimated uncollectible accounts using percentage of sales method: $27,900

Adjusted balance for allowance for doubtful accounts: $101,745

Finally, we can calculate the amount of bad debt expense to be recognized in the adjusting entry:

Current balance of allowance for doubtful accounts: $2,575 
Add: Increase in allowance for doubtful accounts: $99,170 ($101,745 - $2,575) 
Less: Beginning balance of allowance for doubtful accounts: $0

Bad debt expense for the year: $99,170

Therefore, the answer is B) $16,372.20, which is the closest option to our calculated bad debt expense.

Acme Company Has Credit Sales of $3