At the end of the year,Smith Company has the following information available: The company uses the percent-of-sales method to estimate bad debts and has not prepared the adjusting journal entry for Uncollectible-Account Expense at year end.In the prior year,uncollectible accounts were estimated at 1% of credit sales.What should the company do for uncollectible accounts at the end of the current year?

Question

At the end of the year,Smith Company has the following information available:  The company uses the percent-of-sales method to estimate bad debts and has not prepared the adjusting journal entry for Uncollectible-Account Expense at year end.In the prior year,uncollectible accounts were estimated at 1% of credit sales.What should the company do for uncollectible accounts at the end of the current year?

Quizplus · Accepted Answer

The company should both increase the percentage in the percent-of-sales method and reexamine credit policies in order to better estimate and reduce the amount of uncollectible accounts at the end of the current year. Simply changing to the direct write-off method is not a sufficient solution as it does not address the underlying issues with credit policies and estimating bad debts. Therefore, the best choice is D.

At the End of the Year,Smith Company Has the Following