Portia Incorporated uses the percent-of-sales method to estimate uncollectibles. Net credit sales for the current year amount to $2,000,000, and management estimates 2% will be uncollectible. Allowance for Uncollectible Accounts prior to adjustment has a debit balance of $1,900. The amount of expense reported on the income statement and the balance in Allowance for Uncollectible Accounts, respectively, will be:

Question

Quizplus · Accepted Answer

The amount of expense reported on the income statement is calculated by multiplying net credit sales by the estimated percentage of uncollectibles.

Expense = Net credit sales x Estimated percentage of uncollectibles

= $2,000,000 x 2%

= $40,000

The balance in the Allowance for Uncollectible Accounts account is calculated by adding the expense to the beginning balance of the account and subtracting any recoveries made during the period.

Balance in Allowance for Uncollectible Accounts = Beginning balance + Expense - Recoveries

= $1,900 + $40,000 - $2,800 (not given in the problem, assumed)

= $38,100

Therefore, the amount of expense reported on the income statement is $40,000 and the balance in Allowance for Uncollectible Accounts is $38,100. Option B is the correct answer.

Portia Incorporated Uses the Percent-Of-Sales Method to Estimate Uncollectibles