The income statement approach for estimating bad debts focuses on:

• A. Writing off specific accounts receivable as uncollectible
• B. Estimating bad debt expense as a percentage of credit sales
• C. Estimating the ending balance of the Allowance for Doubtful Accounts
• D. Adjusting prepaid expenses to their current value

Answer: (B)

Verified step by step guidance

1. Understand the concept of bad debts: Bad debts are accounts receivable that are unlikely to be collected. Companies estimate bad debts to comply with the matching principle, ensuring expenses are recorded in the same period as the related revenues.
2. Learn about the income statement approach: This method estimates bad debt expense as a percentage of credit sales during a specific period. It focuses on the relationship between sales and the expected uncollectible accounts.
3. Distinguish the income statement approach from other methods: Unlike the balance sheet approach, which estimates the ending balance of the Allowance for Doubtful Accounts, the income statement approach directly calculates bad debt expense based on credit sales.
4. Apply the formula for estimating bad debt expense: Use the formula \( \text{Bad Debt Expense} = \text{Credit Sales} \times \text{Estimated Percentage of Uncollectible Accounts} \). This percentage is typically based on historical data or industry standards.
5. Recognize the purpose of this approach: The income statement approach ensures that bad debt expense is matched with the revenue generated during the same period, aligning with the accrual basis of accounting.