Percent of Sales Method At the end of the current year, Accounts Receivable has a balance...

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Percent of Sales Method At the end of the current year, Accounts Receivable has a balance...

Percent of Sales Method At the end of the current year, Accounts Receivable has a balance of $510,000; Allowance for Doubtful Accounts has a credit balance of $4,500; and sales for the year total $2,300,000. Bad debt expense is estimated at 1/4 of 1% of sales.

1. Determine the amount of the adjusting entry for un-collectible accounts. $

2. Determine the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense.

Accounts Receivable $

Allowance for Doubtful Accounts $

Bad Debt Expense $

3. Determine the net realizable value of accounts receivable. $

business accounting

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Answer 1

Answer #1

Percent of Sales Method -

This method is used by the company to derived how much bad debt expenses to be recognised in the financial year. In this method bad debts calculate as percentage of Credit Sales hence balance in allowance for doubtful account can not be consider in calculation of bad debts.

Bad debt Expense = % of Credit Sales

Accounts Receivable = $510,000 Dr.

Allowance for Doubtful Accounts = $4,500

Sales = $2,300,000

Bad debt Expense = % of Sales X 1/4

= ($2,300,000 x 1%) x 1/4

= $23,000 x 1/4

= $5,750

1. Determine the amount of the adjusting entry for un-collectible accounts. $

Bad Debt Expenses $5,750

Allowance for Doubtful Accounts $5,750

2. Determine the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense.

Accounts Receivable $ = $510,000 Dr.

Allowance for Doubtful Accounts $ = $4,500 + $5750 = $10,250

Bad Debt Expense $ = $5,750

3. Determine the net realizable value of accounts receivable. $

Net Realisable Value = $510,000 - $10,250

= $499,750

In this method when there is situation where company needs to write off debtors in such case they don't charge to income statement te effect will be as follows -

Allowance for Doubtful Accounts Dr.

Accounts Receivables Cr.

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Answer 2

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