San Mateo Company had the following account balances at December 31, 2013, before recording bad debt expense for the year: San Mateo is considering the following approaches for estimating bad debts for 2013: • Based on 3% of credit sales
• Based on 6% of year-end accounts receivable
What amount should San Mateo charge to bad debt expense at the end of 2013 under each method?

Question

San Mateo Company had the following account balances at December 31, 2013, before recording bad debt expense for the year:  San Mateo is considering the following approaches for estimating bad debts for 2013: • Based on 3% of credit sales
• Based on 6% of year-end accounts receivable
What amount should San Mateo charge to bad debt expense at the end of 2013 under each method?

Quizplus · Accepted Answer

Option a uses the percentage of credit sales to estimate bad debts, but this approach does not consider the accounts receivable balance at the end of the period. Option b uses the percentage of year-end accounts receivable, which takes into account the balances that are actually outstanding at the end of the period. Therefore, option b is a better estimate of the actual bad debts that may occur. Option c and d are not provided in the question.

San Mateo Company Had the Following Account Balances at December