PE 9-3A Percent of sales method

At the end of the current year, Accounts Receivable has a balance of $325,000; Allowance for Doubtful Accounts has a credit balance of $3,900; and net sales for the year total $4,500,000. Bad debt expense is estimated at ½ of 1% of net sales.

Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.

Answer:
a. $22,500 ($4,500,000 × 0.005)

                                                                                         Adjusted Balance
b. Accounts Receivable........................................................ $325,000
Allowance for Doubtful Accounts ($3,900 + $22,500)....       26,400
Bad Debt Expense............................................................        22,500  

c. Net realizable value ($325,000 – $26,400)....................... $298,600

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