Question

Flyer Company has provided the following information prior to any year-end bad debt adjustment: Cash sales, $156,000 Credit sales, $456,000 Selling and administrative expenses, $116,000 Sales returns and allowances, $36,000 Gross profit, $496,000 Accounts receivable, $165,000 Sales discounts, $20,000 Allowance for doubtful accounts credit balance, $1,800 Flyer estimates bad debt expense assuming that 1% of credit sales have historically been uncollectible. What is the balance in the allowance for doubtful accounts after bad debt expense is recorded?

Answer 1

The bad debt expense is $640

Step-by-step explanation:

Aging of account receivable method is a method of sorting receivables to estimate the bad debts expense of a business. Using the aging of accounts receivable method, the estimated amount that will not be collected should be the credit balance in the allowance for Doubtful Accounts.

Since 1% of credit sales have historically been uncollectible, therefore 1% of Selling and administrative expenses = 0.01 * $116000 = $1160.

Credit balance in the allowance for doubtful accounts = $1,800, the difference between the desired new balance and the existing balance would give the bad debt expense

Bad debts expense = $1800 - $1160 = $640