Question

Angelo’s Outlet used to report bad debt using the balance sheet method and is now switching to the income statement method. The percentage uncollectible will remain constant at 5%. Credit sales figures for 2019 were $866,000, and accounts receivable was $732,000. How much will Angelo’s Outlet report for 2019 bad debt estimation under the income statement method?

Answer 1

Using the income statement method, Angelo's Outlet will estimate its 2019 bad debt as 5% of its credit sales, which amounts to $43,300.

Step-by-step explanation:

Angelo's Outlet is making a transition from the balance sheet method to the income statement method for estimating bad debt. Under the income statement method, bad debt is estimated as a percentage of credit sales. Given that the percentage deemed uncollectible will remain at 5%, we can calculate the bad debt estimation for the 2019 credit sales of $866,000 by applying the 5% rate directly on the credit sales figure. Therefore, the estimated bad debt for Angelo's Outlet for 2019 using the income statement method would be:

Bad Debt Estimation = 5% of $866,000

= 0.05 × $866,000

= $43,300

So, Angelo's Outlet will report $43,300 as the estimated bad debt for 2019 using the income statement method.