Question

The Reingold Hat Company uses the allowance method to account for bad debts. During 2016, the company recorded $800,000 in credit sales. At the end of 2016, account balances were: Accounts receivable, $120,000; Allowance for uncollectible accounts, $3,000 (credit). If bad debt expense is estimated to be 3% of credit sales, the appropriate adjusting entry will include a debit to bad debt expense of:
A) Zero.
B) $27,000
C) $21,000
D) $24,000

Answer 1

Answer:

Correct answer is D $24,000

Explanation:

At the end of the calendar year, it is based on the company's policy to set bad debt expense at 3% based on the credit sales. Therefore, at the end of every period, 3% of the credit sales is the recognized as bad debts. Computation of which as follows:

Credit sales $800,000 x 3% = $24,000

ENTRY TO RECORD:

Debit Bad debt expense $24,000

Credit Allowance for uncollectible accounts $24,000

*$24,000 of bad debts is added to uncollectible accounts balance.