Question

During the year ended December 31, 2015, Kelly's Camera Shop had sales revenue of $145,000, of which $72,500 was on credit. At the start of 2015, Accounts Receivable showed a $10,000 debit balance and the Allowance for Doubtful Accounts showed a $550 credit balance. Collections of accounts receivable during 2015 amounted to $63,000.Data during 2015 follow:a. On December 10, a customer balance of $1,250 from a prior year was determined to be uncollectible, so it was written off.b. On December 31, a decision was made to continue the accounting policy of basing estimated bad debt losses on 2 percent of credit sales for the yearRequired:1. Show how the amounts related to Accounts Receivable and Bad Debt Expense would be reported on the balance sheet and income statement for 2015.2. On the basis of the data available, does the 2 percent rate appear to be reasonable?

Answer 1

a) on the income statement there will be bad debt expense for 845 dollars

b) It may be a good idea to increase the rate as it fall short.

Step-by-step explanation:

allowance for the year 2015:

2% of credit sales:

2% of $ 72,500 = $ 145

allowance balance before adjustment

beginning 550 - 1,250 write-off + bad debt expense = ending of 145

bad debt expense = 845

As the balance of allowance hit debit blaance we should consider to increase the allowance rate. Notice we write-off more than the provision we create