A Company Uses the Percent of Sales Method to Determine

question 191

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:
$$\begin{array} { l l } \text { Accounts receivable } & \$ 375,000 \text { debit } \\\text { Allowance for uncollectible accounts } & 500 \text { debit } \\\text { Net Sales } & 800,000 \text { credit }\end{array}$$
All sales are made on credit.Based on past experience,the company estimates 0.6% of net 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:

Variance

A statistical measure that represents the dispersion of data points in a data set around the mean, indicating how spread out the data is.

American Call Option

An option contract that gives the holder the right, but not the obligation, to buy a security at a specified price before the option expires.

Expiration Date

The specified date on which an options or futures contract becomes null and void.

ESOs

Employee Stock Options refer to the rights given to employees, included in their remuneration package, enabling them to buy shares of the company stock at a predetermined price.