Question

Cary Inc. reported net credit sales of $300,000 for the current year. The unadjusted credit balance in its Allowance for Doubtful Accounts is $500. The company has experienced bad debt losses of 1% of credit sales in prior periods. Using the percentage of credit sales method, what amount should the company record as an estimate of Bad Debt Expense?
a) $2,500
b) $3,000
c) $2,980
d) $3,200

Answer 1

Answer: b. $3,000

Explanation:

The company's bad debt for the current year is said to be 1% of the credit sales because this is the usual rate for the past periods.

The bad debt expense for this year is therefore:

= Bad debt percentage * Credit sales

= 1% * 300,000

= $3,000

This will then be posted to the Allowance for Doubtful Accounts.