Question

Assume Simple Co. had credit sales of $253,000 and cost of goods sold of $153,000 for the period. Simple uses the percentage of credit sales method and estimates that 2 percent of credit sales would result in uncollectible accounts. Before the end-of-period adjustment is made, the Allowance for Doubtful Accounts has a credit balance of $280. What amount of Bad Debt Expense would the company record as an end-of-period adjustment?

Answer 1

$4,780

Step-by-step explanation:

When a company makes sales on account, debit accounts receivable and credit sales. Based on assessment, some or all of the receivables may be uncollectible.

To account for this, debit bad debit expense and credit allowance for doubtful debt. Should the debt become uncollectible (i.e go bad), debit allowance for doubtful debt and credit accounts receivable.

Where a debit that had previously been determined to have gone bad gets settled, debit cash and credit bad debt expense.

Allowance required

= 2% * $253,000

= $5,060

Since the Allowance for Doubtful Accounts has a credit balance of $280, the amount of Bad Debt Expense required as an end-of-period adjustment is

= $5,060 - $280

= $4,780

Answer 2

Debit Bad debt expense $4,780

Credit Allowance for doubtful accounts $4,780

Step-by-step explanation:

The percentage of credit sales method is a that portion of credit sales that management has deemed as uncollectible based on historical information.

2% of the credit sales ($253,000) is $5,060. Meanwhile, Simple has a credit balance of $280 in its Allowance account, therefore bad debt expense would be $4,780 ($5,060 - $280), as recorded in the journals above.

The cost of goods sold of $153,000 is irrelevant.