A Company Used the Percent of Sales Method to Determine

question 142

Multiple Choice

A company used 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: All sales are made on credit. Based on past experience, the company estimates 1% 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 $19,750; credit Allowance for Doubtful Accounts $19,750.
• B) Debit Bad Debts Expense $15,225; credit Allowance for Doubtful Accounts $15,225.
• C) Debit Bad Debts Expense $22,250; credit Allowance for Doubtful Accounts $22,250.
• D) Debit Bad Debts Expense $7,350; credit Allowance for Doubtful Accounts $7,350.
• E) Debit Bad Debts Expense $21,000; credit Allowance for Doubtful Accounts $21,000.

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Definitions:

Covenants

Legal agreements or conditions included in contracts such as bonds or loans that dictate certain actions the issuer or borrower must perform or avoid.

Dividends

Distributions of a portion of a company's earnings decided by the board of directors to its shareholders.

Retained Earnings

The portion of a company's profits that is not distributed to shareholders as dividends but is kept back in the business for reinvestment or to pay off debt.

Equity Financing

The method of raising capital by selling company shares to investors; in return, investors receive ownership interests in the company.