A Company Uses the Percent of Sales Method to Determine

question 20

Multiple Choice

A company uses the percent of sales method to determine its bad debts expense. At the end of the current year, the company's unadjusted trial balance reported the following selected amounts: $$\begin{array} { | l | r | } \hline \text { Accounts receivable } & \$ 375,000 \text { debit } \\\hline \text { Allowance for uncollecible accounts } & 500 \text { debit } \\\hline \text { Net Sales } & 800,000 \text { credit } \\\hline\end{array}$$ All sales are made on credit. Based on past experience, the company estimates 0.6% of credit sales to be uncollectible. What adjusting entry should the company make at the end of the current year to record its estimated bad debts expense?

• A)Debit Bad Debts Expense $2,130; credit Allowance for Doubtful Accounts $2,130.
• B)Debit Bad Debts Expense $2,630; credit Allowance for Doubtful Accounts $2,630.
• C)Debit Bad Debts Expense $4,300; credit Allowance for Doubtful Accounts $4,300.
• D)Debit Bad Debts Expense $4,800; credit Allowance for Doubtful Accounts $4,800.
• E)Debit Bad Debts Expense $5,300; credit Allowance for Doubtful Accounts $5,300.

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Definitions:

Depreciation Expense

Depreciation Expense is an accounting method used to allocate the cost of a tangible asset over its useful life, representing how much of an asset's value has been used up over a specific period.

Amortization

The process of gradually writing off the initial cost of an asset over a period, often referring to intangible assets.

Bonds Payable

Long-term liabilities represented by bonds that a company is obligated to pay back at a specified maturity date, including principal and interest.

Operating Activities

Activities that relate directly to the operation of the business for producing and delivering goods and/or services, reflected in the cash flow statement.