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

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?

Quizplus · Accepted Answer

First, we need to calculate the company's net credit sales:
Net credit sales = Credit sales - Sales returns and allowances
Net credit sales = $330,000 - $22,000
Net credit sales = $308,000

Then, we need to calculate the estimated bad debts expense:
Estimated bad debts expense = Net credit sales x Percentage estimated to be uncollectible
Estimated bad debts expense = $308,000 x 0.6%
Estimated bad debts expense = $1,848

Since the company has a credit balance in its current bad debts expense account of $768, we only need to debit the difference between the estimated bad debts expense and the current balance:
Adjusting entry = Estimated bad debts expense - Current bad debts expense balance
Adjusting entry = $1,848 - $768
Adjusting entry = $1,080

Therefore, the correct answer is D) $1,080.

A Company Uses the Percent of Sales Method to Determine