A Company Uses the Percent of Receivables Method to Determine

question 8

Multiple Choice

A company uses the percent of receivables 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 3.5% 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 $13,975; credit Allowance for Doubtful Accounts $13,975.
• B) Debit Bad Debts Expense $15,225; credit Allowance for Doubtful Accounts $15,225.
• C) Debit Bad Debts Expense $16,475; credit Allowance for Doubtful Accounts $16,475.
• D) Debit Bad Debts Expense $7,350; credit Allowance for Doubtful Accounts $7,350.
• E) Debit Bad Debts Expense $17,350; credit Allowance for Doubtful Accounts $17,350.

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Definitions:

Uncollectible

Refers to accounts receivable that are considered to be uncollectable and are thus written off as a bad debt expense.

Cash Receipts

The collection of money (currency, checks, wire transfers) by a business from its customers or other parties.

Inventory Purchases

The total cost associated with buying goods and materials kept in stock for the purpose of resale or production in a given period.

Administrative Expenses

Costs related to the general operation of a company, such as salaries of executive personnel, legal fees, and insurance.