A company uses the percent of sales method to determine its bad debts expense.At the end of the current year,the company's unadjusted trial balance reported the following selected amounts: All sales are made on credit.Based on past experience,the company estimates that 0.6% of net credit sales are uncollectible.What amount should be debited to Bad Debts Expense when the year-end adjusting entry is prepared?

Question

Quizplus · Accepted Answer

First, we need to calculate the company's net credit sales, which is total credit sales minus sales returns and allowances.

Net credit sales = Credit sales - Sales returns and allowances = $198,000 - $9,000 = $189,000

Next, we need to apply the estimated uncollectible percentage of 0.6% to the net credit sales to get the estimated bad debts expense for the year:

Estimated bad debts expense = Net credit sales x Estimated uncollectible percentage 
= $189,000 x 0.6% 
= $1,134

However, the question asks for the amount that should be DEBITED to Bad Debts Expense, which means we need to adjust for the current balance in the Bad Debts Expense account.

From the trial balance, we see that the balance in the Bad Debts Expense account is $3,666. To get the amount that should be debited to the account, we need to subtract this balance from the estimated bad debts expense:

Adjusting entry to Bad Debts Expense = Estimated bad debts expense - Current balance in Bad Debts Expense 
= $1,134 - $3,666 
= -$2,532

Note that the adjusted entry to Bad Debts Expense is a negative amount, which means that we need to CREDIT the account for this amount, not debit it. So we flip the sign and choose the answer option that matches:

Adjusted entry to Bad Debts Expense = -$2,532 
Answer: D, $4,800 (Debit to Bad Debts Expense = -$2,532 flipped to a positive amount)

A Company Uses the Percent of Sales Method to Determine