Question

Sully Corporation uses an allowance method for accounting for bad debt expense. Sully estimates that 2% of sales will eventually become uncollectible. If Sully has $100,000 of credit sales and $100,000 of cash sales during the year, the adjustment for estimated uncollectible accounts will require a:___________.

Answer 1

The adjustment for estimated uncollectible accounts would be $2,000, which is 2% of Sully Corporation's credit sales, as only credit sales are subject to potential bad debt.

Step-by-step explanation:

Sully Corporation, using an allowance method for accounting for bad debt expense, estimates that 2% of sales will eventually become uncollectible. Since Sully has $100,000 in credit sales, to which the bad debt expenses apply (cash sales are not considered given that payment is received immediately), they calculate the adjustment for estimated uncollectible accounts as follows:

Estimated bad debt expense = 2% of credit sales
Estimated bad debt expense = 2% of $100,000
Estimated bad debt expense = $2,000

Therefore, the adjustment required would be a debit of $2,000 to Bad Debt Expense and a credit of $2,000 to Allowance for Doubtful Accounts.