Question

On average, 5% of credit sales has been uncollectible in the past. At year-end, before adjusting entries, the Accounts Receivable balance is $100,000 and the Allowance for Doubtful Accounts balance is $500 (credit). Net credit sales during the year were $150,000. Using the percentage of credit sales method, the ending balance in the "Allowance for Doubtful Accounts" is

Answer 1

Answer: $7500

Step-by-step explanation:

The following can be deduced from the question:

Accounts Receivable balance= $100,000

Allowance for Doubtful Accounts = $500

Net credit sales = $150,000.

Percentage-of-sales approach states that the amount of bad debt expense that is recognized by a company will be calculated as a percentage of the credit sales that are generated during the current accounting period.

Using the percentage of credit sales method, the ending balance in the "Allowance for Doubtful Accounts" will be:

= Net credit sales × percentage of credit sales uncollected in the past

= $150,000 × 5%

= $150,000 × 0.05

= $7500