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    Skooby's Avatar
    Skooby Posts: 7, Reputation: 1
    New Member
    		  
    #1

    Dec 6, 2009, 10:06 AM
    Bad Debt Expense/Credit sales?
    A company estimates bad debt expense using a percentage of credit sales (4%). The company began its current year with an $8,500 balance in the allowance account. During the current year, $10,500 of accounts receivable were written off, and $1,200 of previously written off accounts were collected. Credit sales for the year were $200,000. The bad debt expense for the year was:

    a. $10,500
    b. $7,200
    c. $8,000
    d. $6,000


    I think the answer is c. $8,000. $200,000 * .04 = $8,000.

    I think that the balance of the allowance account is ignored when calculating by percentage of credit sales but I'm not sure. And I don't know where the accounts receivable write-off ($10,500) and the $1,200 collected comes into play.
    rehmanvohra's Avatar
    rehmanvohra Posts: 739, Reputation: 27
    Senior Member
    		  
    #2

    Dec 6, 2009, 10:16 AM

    You are correct. The write off and the recovery of previously written off amounts will be reported in the allowance account whether you use the balance sheet or income statement approach.
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