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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 $ 353,000 debit Allowance for uncollectible accounts 620 debit Net Sales 798,000 credit All sales are made on credit. Based on past experience, the company estimates that 0.6% of net credit sales are uncollectible. What amount should be debited to Bad Debts Expense when the year-end adjusting entry is prepared?

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Answer:

The amount of  Bad Debts Expense should be recorded when the year-end adjusting entry is prepared is $4,788

Explanation:

As the company use Percentage of sales method for estimating bad debt, the Bad Debt expenses for the year will not be dependent on the Opening balance of Allowance for Uncollectible Accounts, instead, it is recorded at the amount of Net Credit Sales x Percentage of uncollectible from Credit Sales.

Thus, we have bad debt expenses for the period is Net of Credit Sales x Percentage of uncollectible from Credit Sales = 798,000 x 0.6% = $4,788.

The detailed adjusting entry for Bad Debt Expenses at year-end is:

Dr Bad Debt Expense                                             4,788

Cr Allowance for uncollectible accounts              4,788

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