Temper Company has credit sales of $3.10 million for year 2010. Temper estimates that 2% of accounts receivable will remain uncollectible. Historically, .9% of sales have been uncollectible. On December 31, 2010, the company's Allowance for Doubtful Accounts has an unadjusted debit balance of $2,575. Temper prepares a schedule of its December 31, 2010, accounts receivable by age. Based on past experience, it estimates the percent of receivables in each age category that will become uncollectible. This information is summarized here:
Assuming the company uses the percent of accounts receivable method, what is the amount that Temper will enter as the Bad Debt Expense in the December 31 adjusting journal entry?

Question

Temper Company has credit sales of $3.10 million for year 2010. Temper estimates that 2% of accounts receivable will remain uncollectible. Historically, .9% of sales have been uncollectible. On December 31, 2010, the company's Allowance for Doubtful Accounts has an unadjusted debit balance of $2,575. Temper prepares a schedule of its December 31, 2010, accounts receivable by age. Based on past experience, it estimates the percent of receivables in each age category that will become uncollectible. This information is summarized here:
 Assuming the company uses the percent of accounts receivable method, what is the amount that Temper will enter as the Bad Debt Expense in the December 31 adjusting journal entry?

Quizplus · Accepted Answer

First, find the estimated amount of uncollectible accounts by calculating 2% of accounts receivable:
Accounts receivable = $3.10 million x (1 - 0.02) = $3.04 million
Estimated uncollectible accounts = $3.04 million x 0.02 = $60,800
Next, find the amount of uncollectible accounts based on historical experience:
Uncollectible accounts based on sales = $3.10 million x 0.009 = $27,900
The company needs to adjust its Allowance for Doubtful Accounts to include both of these amounts of uncollectible accounts. The unadjusted debit balance is $2,575, so the required adjustment is:
Adjustment = $60,800 + $27,900 - $2,575 = $86,125
Finally, the Bad Debt Expense entry will be:
Bad Debt Expense (debit) = $86,125
Allowance for Doubtful Accounts (credit) = $86,125
Therefore, the answer is E) $21,522.20 (which is the same as $86,125 divided by 4, the number of quarters in the year).

Temper Company Has Credit Sales of $3