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 0.6% of net credit sales to be uncollectible.What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense?

Question

Quizplus · Accepted Answer

First, we need to calculate the net credit sales which is $800,000 - $32,000 (sales returns) = $768,000.
Then, we need to multiply the net credit sales by the estimated percentage of uncollectible accounts: $768,000 x 0.6% = $4,608.
This amount represents the estimated bad debts expense. However, the existing balance in the Allowance for Doubtful Accounts is $0, so we need to adjust it by the full amount of the estimated bad debts expense: 
Debit Bad Debts Expense $4,800; credit Allowance for Doubtful Accounts $4,800. 
Therefore, the correct answer is D.

A Company Uses the Percent of Sales Method to Determine