Final answer:
The subject of this question is Business and it is suitable for High School level. The allowance for doubtful accounts is calculated as a percentage of net credit sales. The accounts receivable balance is compared to the calculated allowance to determine the expected bad debts.
Step-by-step explanation:
The subject of this question is Business and it is suitable for High School level. In this case, we are dealing with the concept of allowances for doubtful accounts.
To calculate the allowance for doubtful accounts, we multiply the net credit sales by the allowance percentage. In this case, the allowance is calculated as 8.5% of $5,000,000, which is $425,000.
The accounts receivable balance of $180,000 is less than the calculated allowance of $425,000, so Karl Clothiers is not expected to experience significant bad debts.