Question

At the end of a period (before adjustment), Allowance for Doubtful Accounts has a credit balance of $250. The net credit sales for the period total $500,000. If the company estimates uncollectible accounts expense at 1% of net credit sales, the amount of bad debt expense to be recorded in an adjusting entry is $4,750.

Answer 1

Bad debt expense is $5,000 and not $4,750. So, Statement is false.

Step-by-step explanation:

As per calculation of bad debt expense based on percentage of sales method, bad debt expense recognized is the percentage of credit sales irrespective of any balance in allowance for doubtful account.

Balance in allowance for doubtful debt is not considered at all.

In this case, credit sales = $500,000

Estimation of uncollectible account = 1%

Bad debt expense = 0.01× 500,000

= $5,000

Adjusting entry to record bad debt expense is:

Bad debt expense......................Dr $5,000

Allowance for doubtful debt $5,000

(Bad debt expense recognized)

New balance in allowance for doubtful account = 5,000 + 250

= $5,250