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Net Accounts Receivable: Percentage of Sales Method quiz #1

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  • How is bad debt expense calculated using the Percentage of Sales Method, and which type of sales does this method apply to?
    Bad debt expense is calculated by applying a specified percentage to total credit sales for the period. This method only applies to credit sales, not cash sales, because bad debts are only relevant to amounts owed by customers.
  • What is the journal entry to record bad debt expense under the Percentage of Sales Method, and how is the ending balance in the Allowance for Doubtful Accounts determined if there are no write-offs?
    The journal entry debits Bad Debt Expense and credits Allowance for Doubtful Accounts for the calculated amount. The ending balance in the Allowance for Doubtful Accounts is found by adding the beginning balance to the bad debt expense, assuming there are no write-offs.
  • What type of sales does the Percentage of Sales Method use to estimate bad debt expense?
    It uses only credit sales, because bad debts are only relevant to amounts owed by customers.
  • How do you calculate bad debt expense using the Percentage of Sales Method?
    Multiply total credit sales for the period by the specified percentage estimated to be uncollectible.
  • Why are cash sales excluded from the calculation of bad debt expense in this method?
    Cash sales are excluded because the company has already received the cash, so there is no risk of uncollectibility.
  • What is the journal entry to record bad debt expense under the Percentage of Sales Method?
    Debit Bad Debt Expense and credit Allowance for Doubtful Accounts for the calculated bad debt expense amount.
  • If a company has $1,500,000 in credit sales and estimates 2% as uncollectible, what is the bad debt expense?
    The bad debt expense is $30,000 (1,500,000 x 0.02).
  • How do you determine the ending balance in the Allowance for Doubtful Accounts if there are no write-offs?
    Add the beginning balance in the allowance account to the bad debt expense for the period.
  • In the example, if the beginning balance in the Allowance for Doubtful Accounts is $12,000 and the bad debt expense is $30,000, what is the ending balance?
    The ending balance is $42,000 ($12,000 + $30,000).
  • What effect do write-offs have on the Allowance for Doubtful Accounts when using the Percentage of Sales Method?
    Write-offs reduce the balance in the Allowance for Doubtful Accounts, but if there are no write-offs, only the beginning balance and bad debt expense are considered.