A company uses the percent of sales method to determine its bad debts expense. At the end of the current year, the company's unadjusted trial balance reported the following selected amounts:

Accounts receivable $ 346,000 debit
Allowance for uncollectible accounts 690 credit
Net sales 791,000 credit

D) Debit Bad Debts Expense $1,683; credit Allowance for Doubtful Accounts $1,683.

Explanation:

First thing to do is to complete the question as:

Based on past experience, the company estimates 0.3% of net credit sales to be uncollectible. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense?

Multiple Choice

A) Debit Bad Debts Expense $1,728; credit Allowance for Doubtful Accounts $1,728.

B)  Debit Bad Debts Expense $3,063; credit Allowance for Doubtful Accounts $3,063.

C)  Debit Bad Debts Expense $1,038; credit Allowance for Doubtful Accounts $1,038.

D) Debit Bad Debts Expense $1,683; credit Allowance for Doubtful Accounts $1,683.

E)  Debit Bad Debts Expense $2,373; credit Allowance for Doubtful Accounts $2,373.

Solution

Part 1) Determine the estimated uncollectible this will be based on the past experiences. The calculation is as follows

Net Sales x The Company's estimate of net credit sales which are uncollectible

= $791,000 x 0.3 = $2,373

Part 2: Determine the total amount in the adjusting entry as follows

The calculation will be as follows:

The estimated uncollectible calculated in part 1 - the given allowance for the uncollectible account (allowance for doubtful accounts)

Note we are subtracting the amount in the doubtful accounts because it is a credit and not a debit figure

Therefore:

$2,373 - $690 = $1,683

Based on the figures we do the following

D) Debit Bad Debts Expense $1,683; credit Allowance for Doubtful Accounts $1,683.

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