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 that 0.6% of credit sales are uncollectible. What amount should be debited to Bad Debts Expense when the year-end adjusting entry is prepared?
A)$1,275
B)$1,775
C)$4,500
D)$4,800
E)$5,500

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 that 0.6% of credit sales are uncollectible. What amount should be debited to Bad Debts Expense when the year-end adjusting entry is prepared?
A)$1,275 
B)$1,775 
C)$4,500 
D)$4,800 
E)$5,500

Quizplus · Accepted Answer

Using the percent of sales method, we need to determine the company's credit sales for the year:
Credit sales = Total sales − Cash sales
Credit sales = $300,000 − $90,000
Credit sales = $210,000

Next, we need to calculate the estimated uncollectible amount based on the given percentage:
Estimated uncollectible amount = Credit sales x Percent estimated to be uncollectible
Estimated uncollectible amount = $210,000 x 0.6%
Estimated uncollectible amount = $1,260

Lastly, we need to adjust the balance in the Bad Debts Expense account to match the estimated uncollectible amount:
Bad Debts Expense = Estimated uncollectible amount − Existing balance in Bad Debts Expense account
Bad Debts Expense = $1,260 − $540
Bad Debts Expense = $720

Therefore, the amount that should be debited to Bad Debts Expense when the year-end adjusting entry is prepared is $4,800 (answer choice D).

A Company Uses the Percent of Sales Method to Determine