Question

2.857 points QUESTION 26 1. The Andersen Company gets to the end of Year One and reports accounts receivable of $500,000 and credit sales for the period of $1.2 million. The ending allowance for doubtful accounts balance is a $1,000 debit balance as a result of the accounts written off for the year. Company officials have a choice of estimating bad debts as 4 percent of receivables or 2 percent of sales. Which of the following statements is true? If the percentage of sales method is selected, net income will be $2,000 lower than if the percentage of receivables method is selected If the percentage of sales method is selected, net income will be $1,000 lower than if the percentage of receivables method is selected If the percentage of sales method is selected, net income will be $3,000 lower than if the percentage of receivables method is selected If the percentage of sales method is selected, net income will be $4.000 lower than if the percentage of receivables method is selected

Answer 1

Percentage of sales	Percentage of receivables
As per this concept, bad debt is based on certain percentage of credit sales. Bad debt = 1,200,000 X 2% = $ 24,000	As per this concept, the amount of bad debt is computed as percent of accounts receivable along other adjustments. Bad debts during the year = 400,000 X 5%                                                 = $ 20,000 Debit balance of accounts written off shall be added to bad debts based on percent. Hence, Total bad debts = 20,000 + 1000 = $ 21,000

Difference = $ 24,000 – 21,000 = $ 3,000

Therefore, if the percentage of sales method is selected, net income will be $3,000 lower than if the percentage of receivables method is selected. So, correct option is c.

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