Question

At the end of each month, management should again estimate the probable
amount of uncollectible accounts and adjust the Allowance for Doubt-
ful Accounts to this new estimate.
To illustrate, assume that at the end of February the credit manager of
World Famous Toy Company analyzes the accounts receivable and esti-
mates that approximately $11,000 of these accounts will prove uncollecti-
ble. Currently, the Allowance for Doubtful Accounts has a credit balance of
only $6,000, determined as follows: ​

Answer 1

Answer:

Chapter 5: Receivables

Estimating Bad Debts

Estimating uncollectible accounts Accountants use two basic methods to estimate uncollectible accounts for a period. The first method—percentage-of-sales method—focuses on the income statement and the relationship of uncollectible accounts to sales. The second method—percentage-of-receivables method—focuses on the balance sheet and the relationship of the allowance for uncollectible accounts to accounts receivable.

Percentage-of-sales method The percentage-of-sales method estimates uncollectible accounts from the credit sales of a given period. In theory, the method is based on a percentage of prior years’ actual uncollectible accounts to prior years’ credit sales. When cash sales are small or make up a fairly constant percentage of total sales, firms base the calculation on total net sales. Since at least one of these conditions is usually met, companies commonly use total net sales rather than credit sales. The formula to determine the amount of the ending estimated bad debts entry is:

Bad Debt Expense = Net sales (total or credit) x Percentage estimated as uncollectible

To illustrate, assume that Rankin Company’s estimates uncollectible accounts at 1% of total net sales. Total net sales for the year were $500,000; receivables at year-end were $100,000; and the Allowance for Doubtful Accounts had a zero balance. Rankin would make the following adjusting entry at year end:

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