Question

Problem 8-4A Here is information related to Splish Brothers Inc. for 2017. Total credit sales $1,580,000 Accounts receivable at December 31 790,000 Bad debts written off 39,500 (a) What amount of bad debt expense will Splish Brothers Inc. report if it uses the direct write-off method of accounting for bad debts? Bad debts expense $enter the bad debts expense in dollars assuming option a (b) Assume that Splish Brothers Inc. decides to estimate its bad debt expense based on 4% of accounts receivable. What amount of bad debt expense will the company record if Allowance for Doubtful Accounts has a credit balance of $2,700? Bad debts expense $enter the bad debts expense in dollars assuming option b (c) Assume the same facts as in (b), except that there is a $1,000 debit balance in Allowance for Doubtful Accounts. What amount of bad debt expense will Splish Brothers Inc. record? Bad debts expense $enter the bad debts expense in dollars assuming option c

Answer 1

a.

The bad debt expense is $39,500. (Answer)

The whole write-off amount would consider in this method.

b.

Here the target balance should be calculated first.

Target balance = Ending accounts receivable balance × 4%

                        = 790,000 × 4%

                        = $31,600

Now, the bad debt expense should be calculated by a subtraction.

Bad debt expense = Target balance – Credit balance of allowance for doubtful account

                              = 31,600 – 2,700

                              = $28,900 (Answer)

c.

Here the target balance should be calculated first.

Target balance = Ending accounts receivable balance × 4%

                        = 790,000 × 4%

                        = $31,600

Now, the bad debt expense should be calculated by an addition.

Bad debt expense = Target balance + Debit balance of allowance for doubtful account

                              = 31,600 + 1,000

                              = $30,600 (Answer)