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?
A)Debit Bad Debts Expense $2,130; credit Allowance for Doubtful Accounts $2,130.
B)Debit Bad Debts Expense $2,630; credit Allowance for Doubtful Accounts $2,630.
C)Debit Bad Debts Expense $4,300; credit Allowance for Doubtful Accounts $4,300.
D)Debit Bad Debts Expense $4,800; credit Allowance for Doubtful Accounts $4,800.
E)Debit Bad Debts Expense $5,300; credit Allowance for Doubtful Accounts $5,300.

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?
A)Debit Bad Debts Expense $2,130; credit Allowance for Doubtful Accounts $2,130. 
B)Debit Bad Debts Expense $2,630; credit Allowance for Doubtful Accounts $2,630. 
C)Debit Bad Debts Expense $4,300; credit Allowance for Doubtful Accounts $4,300. 
D)Debit Bad Debts Expense $4,800; credit Allowance for Doubtful Accounts $4,800. 
E)Debit Bad Debts Expense $5,300; credit Allowance for Doubtful Accounts $5,300.

Quizplus · Accepted Answer

First, we need to calculate the estimated bad debt expense by using the percent of sales method. The total credit sales for the year are $480,000 ($350,000 + $130,000). 0.6% of $480,000 is $2,880. This is the estimated bad debt expense.
Next, we need to calculate the existing balance in the Allowance for Doubtful Accounts. The trial balance reports a credit balance of $120. This means that there is currently a reserve for doubtful accounts of $120.
Now we can calculate the adjusting entry. The estimated bad debt expense is $2,880, but there is already $120 in the reserve. So the adjusting entry should be for $2,760 ($2,880 - $120).
The adjusting entry will be:
Debit Bad Debts Expense $4,800 ($2,040 + $2,760);
Credit Allowance for Doubtful Accounts $4,800 ($120 + $2,760 + $1,920).

A Company Uses the Percent of Sales Method to Determine