Question

Uncollectible accounts; allowance method estimating bad debts as percentage of net sales vs. direct write-off method [LO7-5, 7-6) Ervin Company uses the allowance method to account for uncollectible accounts receivable. Bad debt expense is established as a percentage of credit sales. For 2021, net credit sales totaled $6,500,000, and the estimated bad debt percentage is 1.50%. No previously written-off accounts receivable were reinstated during 2021. The allowance for uncollectible accounts had a credit balance of $62,000 at the beginning of 2021 and $50,000, after adjusting entries, at the end of 2021. Required: 1. What is bad debt expense for 2021 as a percent of net credit sales? 2. Assume Ervin makes no other adjustment of bad debt expense during 2021. Determine the amount of accounts receivable written off during 2021. 3. If the company uses the direct write-off method, what would bad debt expense be for 2021? 1. Bad debt expense $97,5002. Accounts receivable written off $15,0003. Bad debt expense $98,430

Answer 1

1. Bad debt expense = $97,500

2. Accounts receivable written off = $109,500

3. Bad debt expense for 2021 = $109,500

Step-by-step explanation:

Bad debts expense refers to an uncollectible accounts expense that occurs because goods or services are delivered on credit a company to a customer who did not paid the amount owed.

The questions can be answered as follows:

1. What is bad debt expense for 2021 as a percent of net credit sales?

Under this, bad debt can be calculated using the following formula:

Bad expense = Net credit sales * Estimated bad debt percentage ....... (1)

Where;

Net credit sales = $6,500,000

Estimated bad debt percentage = 1.50%

Substituting the values into equation (1), we have:

Bad debt expense = $6,500,000 * 1.50% = $97,500

2. Assume Ervin makes no other adjustment of bad debt expense during 2021. Determine the amount of accounts receivable written off during 2021.

This can be calculated using the following formula:

Accounts receivable written off = Beginning uncollectible balance + Bad debt expenses - Ending uncollectible balance ............ (2)

Where;

Beginning uncollectible balance = $62,000

Bad debt expenses = $97,500

Ending uncollectible balance = $50,000

Substituting the values into equation (2), we have:

Accounts receivable written off during 2021 = $62,000 + $97,500 - $50,000 = $109,500

3. If the company uses the direct write-off method, what would bad debt expense be for 2021?

Under the direct write-off method, the exact amount of uncollectible accounts as they are specifically identified are recorded.

Based on this explanation, bad debt expense for 2021 is equal to the accounts receivable written off during 2021 calculated in part 2 above. Therefore, we have:

Bad debt expense for 2021 = $109,500