A company uses the percent of sales method to determine its bad debts expense. At the end of the current year, the company's unadjusted trial balance reported the following selected amounts: All sales are made on credit. Based on past experience, the company estimates 0.6% of credit sales to be uncollectible. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense?

Question

A company uses the percent of sales method to determine its bad debts expense. At the end of the current year, the company's unadjusted trial balance reported the following selected amounts:  All sales are made on credit. Based on past experience, the company estimates 0.6% of credit sales to be uncollectible. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense?

Quizplus · Accepted Answer

The company estimates that 0.6% of credit sales will be uncollectible, and total credit sales for the year were $800,000. Therefore, the estimated bad debts expense is 0.6% x $800,000 = $4,800. This amount should be recorded as a debit to Bad Debts Expense and a credit to Allowance for Doubtful Accounts in order to properly account for potential uncollectible accounts receivable. Choice D is the only option that matches this amount.

A Company Uses the Percent of Sales Method to Determine