Question

The percentage of receivables approach to estimating bad debt expense is used by Crane Auto Supply Company. On February 28 (the fiscal year-end), the firm had accounts receivable in the amount of $546,000 and allowance for doubtful accounts had a credit balance of $1,220 before adjustment. Net credit sales for February amounted to $3,210,000. The credit manager estimated that uncollectible accounts would amount to 5% of accounts receivable. On March 10, an accounts receivable from Tom Jones for $2,900 was determined to be uncollectible and written off. However, on March 31, Jones received an inheritance and immediately paid his past due account in full. What is the estimated bad debt expense for Crane Auto Supply Company using the percentage of receivables approach?

1) $27,300
2) $27,300 (adjusted for the recovery of $2,900)
3) $27,300 (adjusted for the recovery of $2,900) + $1,220
4) $27,300 (adjusted for the recovery of $2,900) - $1,220

Answer 1

The estimated bad debt expense for Crane Auto Supply Company using the percentage of receivables approach is $24,400, adjusted for the recovery of $2,900 and the credit balance of allowance for doubtful accounts of $1,220.

Step-by-step explanation:

To calculate the estimated bad debt expense using the percentage of receivables approach, we first need to determine the amount of bad debt expense based on the percentage of accounts receivable. The accounts receivable at the end of February is $546,000 and the credit manager estimated that uncollectible accounts would amount to 5% of accounts receivable. Therefore, the estimated bad debt expense is 5% of $546,000, which is $27,300.

However, we also need to adjust for the recovery of the uncollectible account from Tom Jones. On March 10, his account of $2,900 was determined to be uncollectible and written off, but on March 31, Jones paid his past due account in full. So, we need to subtract the recovery of $2,900 from the estimated bad debt expense, resulting in a final estimated bad debt expense of $27,300 - $2,900 = $24,400.

The correct answer is option 4) $27,300 (adjusted for the recovery of $2,900) - $1,220. The adjustment for the recovery of $2,900 should be subtracted from the estimated bad debt expense, and the credit balance of allowance for doubtful accounts of $1,220 should be subtracted as well.