Question

During the​ year, Carlton Company had net credit sales of $ 40 , 000. At the end of the​ year, before adjusting​ entries, the balance in Accounts Receivable was $ 15 , 000 ​(debit) and the balance in Allowance for Bad Debts was $ 670 ​(credit). If the company uses an income statement approach to estimate bad debts at 4​%, what is the ending balance in the Allowance for Bad Debts​ account?

Answer 1

Ending balance in the Allowance for Bad Debts​ account = $1,600

Step-by-step explanation:

Company's net credit sales for the period = $40,000

Balance of Accounts Receivable = $15,000

Existing balance of Bad Debts = $670

Bad Debts = 4%

Now bad debts = $15,000 X 4% = $600

But the company uses income statement approach which means bad debts on credit sales = $40,000 X 4% = $1,600

Already existing balance = $670

Thus ending balance shall be $1,600

Amount to be added to bad debts allowance = $1,600 - $670 = $930

Note: This is because company follows Income statement approach, otherwise bad debts allowance shall be $600 only based on closing accounts receivable.

Ending balance in the Allowance for Bad Debts​ account = $1,600

Answer 2

The ending balance in the allowance for bad debt account would be $2270.

Step-by-step explanation:

In the question it is told to use income statement approach which is also know as percentage of sales method , we can use this approach to take out the bad debt expenses for the year ending by using the formula -

Bad debt expenses = Total credit sales X Estimated bad debt percentage

= $40,000 x 4%

= $1600

Now by adding this bad debt expense with the credit balance in accounts receivables , we will get the year ending balance in allowance for bad debts account.

ALLOWANCE FOR BAD DEBT ACCOUNTS =

Bad debt expenses + Credit balance in allowance for bad debt

= $1600 + $670

=$2270