A Company Uses the Percent of Sales Method to Determine

question 77

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: $\begin{array}{ll}\text { Accounts receivable } & \$ 375,000 \text { debit } \\\text { Allowance for unco llectible accounts } & 500 \text { credit } \\\text { Net Sales } & 800,000 \text { credit }\end{array}$ All sales are made on credit. Based on past experience, the company estimates that 0.6% of net credit sales are uncollectible. What amount should be debited to Bad Debts Expense when the year-end adjusting entry is prepared?

• A)$4,800
• B)$5,500
• C)$4,500
• D)$1,275
• E)$1,775

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Definitions:

Credit Risk

The risk of loss arising from a borrower's inability to repay a loan or meet contractual obligations.

Payment Default

The failure to meet the legal obligations of a loan, such as not making the agreed-upon monthly payments.

Loan Principal

The initial size of the loan or the amount of money borrowed that is still owed, not including interest.

Low-credit-risk Company

A company deemed to have a minimal risk of defaulting on its debt obligations, often due to strong financial health and stability.