Question

Kelton Inc. reported net credit sales of $490,000 for the current year. The unadjusted credit balance in its Allowance for Doubtful Accounts is $975. The company has experienced bad debt losses of 2% of credit sales in prior periods. Using the percentage of credit sales method, what amount should the company record as an estimate of Bad Debt Expense?

Answer 1

Answer: Kelton Inc. should record $8,825 as an estimate of bad debt expense.

Explanation: The company adopts percentage of credit sales method. So 2% of $490,000 is $9,800. Remember, there was an unadjusted credit balance in allowance for doubtful accounts to the tune of $975, so what needs to be adjusted for would be the difference between $9,800 and $975, which is $8,825. The following would therefore be the journal entries to be recorded:

Debit Bad debt expense $8,825

Credit Allowance for doubtful accounts $8,825