Modern Designs is a new business. During its first year of operations, credit sales were $45,000 and collections of credit sales were $34,000. One account, $700, was written off. Management uses the percent-of-sales method to account for bad debts expense and estimates 3% of credit sales to be uncollectible. Bad debts expense for the first year of operations is ________.

Question

Quizplus · Accepted Answer

Using the percent-of-sales method, bad debts expense can be calculated by multiplying credit sales by the estimated percentage of uncollectible accounts. 
$45,000 x 3% = $1,350. 
Since the company wrote off only one account, the bad debts expense is $1,350 - $700 (the amount of the account written off) = $650.

Modern Designs Is a New Business