Over the past five years,a company had average annual credit sales of $320,000 and an average annual net write-offs of $2,000.Credit sales in the current year are $300,000.Using the percentage of credit sales method,what should the company record as an estimate of bad debt expense?

Question

Quizplus · Accepted Answer

The company can use the average annual net write-offs as a percentage of credit sales to estimate the bad debt expense for the current year.

Percentage of net write-offs = (Average annual net write-offs / Average annual credit sales) x 100%
= (2,000 / 320,000) x 100%
= 0.625%

Estimated bad debt expense = Percentage of credit sales x Credit sales in the current year
= 0.625% x $300,000
= $1,875

Therefore, the best choice is B.

Over the Past Five Years,a Company Had Average Annual Credit