Question

Wren Company had the following account balances at December 31, Year 1: Accounts receivable $ 900,000 Allowance for doubtful accounts before any provision for Year 1 doubtful accounts expense) 16,000 Credit sales for Year 1 1,750,000 Wren is considering the following method of estimating doubtful accounts expense for year 1: • Based on credit sales at 2% • Based on accounts receivable at 5% What amount should Wren charge to doubtful accounts expense under each method? Percentage of credit sales Percentage of accounts receivable

Answer 1

December 31, Year 1:

Accounts receivable $ 900,000

Allowance for doubtful accounts before any provision for Year 1 doubtful accounts expense) 16,000

Credit sales for Year 1 1,750,000

2% credit sales or 5% accounts receivable

1) under the percentage of credit sales, Wren should expense $1,750,000 x 2% = $35,000 - $16,000 (allowance for doubtful accounts balance) = $19,000

the journal entry should be:

Dr Bad debt expense 19,000

Cr Allowance for doubtful accounts 19,000

2) under the percentage of accounts receivable, Wren should expense $900,000 x 5% = $45,000 - $16,000 (allowance for doubtful accounts balance) = $29,000

the journal entry should be:

Dr Bad debt expense 29,000

Cr Allowance for doubtful accounts 29,000