Question

Saint John Industries uses the percentage of credit sales method to estimate Bad Debt Expense. The company reported net credit sales of $550,000 during the year. Saint John has experienced bad debt losses of 2% of credit sales in prior periods. At the beginning of the year, Saint John has a credit balance in its Allowance for Doubtful Accounts of $4,500. No write-offs or recoveries were recorded during the year. What amount of Bad Debt Expense should Saint John recognize for the year?

Answer 1

Percentage of credit sales method states that the amount of bad debt
expense to be recognized by a company is calculated as a percentage
of credit sales made during the current accounting period
This method does not take into consideration the balance in the allowance for doubtful
accounts because such balance is not used in the calculation of bad debt expense
It is also called an Income Statement Approach since it is based on sales revenue
Therefore, the company would recognize $ 11,000 ($ 550,000 x 2%) as bad debt
expense during the year.
Entry would be:
Bad Debt Expense A/c				$ 11,000.00
To Allowance for Doubtful A/c					$ 11,000.00