Question

Saint John Industries uses the percentage of credit sales method to estimate Bad Debt Expense. The company reported net credit sales of $500,000 during the year. Saint John has experienced bad debt losses of 2% of credit sales in prior periods. At the beginning of the year, Saint John has a credit balance in its Allowance for Doubtful Accounts of $4,000. No write-offs or recoveries were recorded during the year. What amount of Bad Debt Expense should Saint John recognize for the year?

Answer 1

When we are estimating bad debts as a percentage of credit sales then bad debt expense to be recognized each year is calculated by the formula

Total Credit Sales * Percentage of bad debts

As per data given in the question the Total Credit Sales = $500,000 and Percentage of bad debts is 2%.

Therefore Bad debt expenses to be recognized for the year by Saint John Industries would be

$500,000 * 2%

$10,000.

The Journal Entry to record the above transaction is

Bad Debt Expense $10,000

Allowance for Doubtful Accounts $10,000

Step-by-step explanation: