Question

Lani Co. uses the allowance method to account for bad debts. At the end of the year, their unadjusted trial balance shows an accounts receivable balance of $400,000; allowance for doubtful accounts balance of $400 (debit); and sales of $1,200,000. Based on history, Lani estimates that bad debts will be 1% of accounts receivable. The entry to record estimated bad debts will include a debit to Bad Debts Expense in the amount of:

A. $3,600
B. $4,000
C. $11,600
D. $12,400
E. $12,000
F. $4,400

Answer 1

Answer: $4,400

Step-by-step explanation:

Answer 2

D. $12,400

Step-by-step explanation:

Use the following formula to calculate the Bad debt expense for the period

Bad debt expesne = Debit balance of Allowance account + Allowance for the period

Where

Debit balance of Allowance account = $400

Allowance for the period = Account receivables x percentage of allowance = $1,200,000 x 1% = $12,000

Placing values in the formula

Bad debt expesne = $400 + $12,000

Bad debt expesne = $12,400