Question

Accounts receivable $1,400,000, allowance for uncollectible accounts (credit balance) $22,000, credit sales for 2024 $1,950,000. San Mateo is considering the following approaches for estimating bad debts for 2024: based on 3% of credit sales and based on 6% of year-end accounts receivable. What amount should San Mateo charge to bad debt expense at the end of 2024 under each method?

Percentage of Credit Sales | Percentage of Accounts Receivable
a. $36,500 | $62,000
b. $58,500 | $62,000
c. $58,500 | $84,000
d. $117,000 | $95,000

Answer 1

San Mateo should charge $58,500 to bad debt expense at the end of 2024 under the percentage of credit sales method, and $84,000 under the percentage of year-end accounts receivable method. The correct answer is (c) $58,500 | $84,000.

Step-by-step explanation:

To determine the amount San Mateo should charge to bad debt expense at the end of 2024 under the percentage of credit sales method, we calculate 3% of the credit sales for the year. With credit sales of $1,950,000, the bad debt expense would be 0.03 × $1,950,000, which equals $58,500.

Under the percentage of accounts receivable method, we calculate 6% of the year-end accounts receivable. The accounts receivable at the end of the year is $1,400,000, so the bad debt expense would be 0.06 × $1,400,000, which amounts to $84,000.

Based on these calculations, the correct answer would be (c) $58,500 | $84,000.