Brief Exercise 8-6 Farr Co. elects to use the percentage-of-sales basis in 2017

Question

Brief Exercise 8-6

Farr Co. elects to use the percentage-of-sales basis in 2017 to record bad debt expense. It estimates that 4% of net credit sales will become uncollectible. Sales revenues are $801,000 for 2017, sales returns and allowances are $45,800, and the allowance for doubtful accounts has a credit balance of $9,000.

Prepare the adjusting entry to record bad debt expense in 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually.)

list of accounts:

Accounts Payable
Accounts Receivable
Allowance for Doubtful Accounts
Bad Debt Expense
Buildings
Cash
Cost of Goods Sold
Income Summary
Interest Receivable
Interest Revenue
Inventory
Land
Maintenance and Repairs Expense
Notes Payable
Notes Receivable
Other Operating Expenses
Prepaid Insurance
Sales Discounts
Sales Returns and Allowances
Sales Revenue
Service Charge Expense
Supplies
Supplies Expense

Explanation / Answer

Bad debt expense = Net credit sales * Estimated % Net Credit sales = Sales revenue - sales returns and allowances = $801000 - $45800 = $7,55,200 Bad debt expense = $7,55,200 * 4% = $30,208 In percentage of sales method, the balance in the allowance for doubtful debts is ignored. After the estimation of bad debts, an adjusting entry is passed to recognize bad debts expense. The entry involves a debit to bad debts expense account and a credit to allowance for doubtful debts account. The adjusting entry to record bad debt expense in 2017 Account Titles Debit Credit Bad debt Expense $30,208.00 Allowance for Doubtful Accounts $30,208.00

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