Question

During the year, Bernard Company had net credit sales of $45,000. At the end of the year, before adjusting entries, the balance in Accounts Receivable was $ 12,500 (debit) and the balance in Allowance for Bad Debts was $650 (credit). If the company uses an income statement approach to estimate bad debts at 5%, what is the ending balance in the Allowance for Bad Debts account?

A: $1,275
B: $1,600
C: $2,250
D: $2,900

Answer 1

The ending balance in the Allowance for Bad Debts account after adjusting entries and a 5% estimate of bad debts would be $2,900.

Step-by-step explanation:

To calculate the ending balance in the Allowance for Bad Debts account using an income statement approach at a 5% estimate, you first determine the amount of bad debts expense by taking 5% of the net credit sales, which in this case is 5% of $45,000, equalling $2,250. Next, you would adjust for the existing credit balance in the Allowance for Bad Debts account. Therefore, you add the current credit balance of $650 to the bad debts expense of $2,250, resulting in a new credit balance of $2,900 in the Allowance for Bad Debts account.