Question

Creek Co. uses the percentage of credit sales method in determining its bad debt expense. The following information comes from the accounting records of Creek Co.: Cash sales $ 260,000 Credit sales 740,000 Total sales 1,000,000 Credit balance in the Allowance for Doubtful Accounts 2,000 Bad debt loss rate 3 % What is the estimate of bad debt expense

Answer 1

$20,200

Step-by-step explanation:

Bad debt Expense will be calculated using the percentage of debt loss. The expense will be calculated using the credit sales only because in cash sales there is no risk of loss.

Estimated Bad Debt = Credit Sales x Rate of bad Debt loss = $740,000 x 3% = $22,200

As Allowance for Doubtful Accounts already have balance of $2,000, we need to adjust the remainder to make the closing balance of Allowance for Doubtful Accounts $22,200 at the year end.

Adjustment required = $22,200 - $2,000 = $20,200

The Expense will be $20,200.