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Company X is in its first year of operations and has decided to use the percentage...

Company X is in its first year of operations and has decided to use the percentage of sales method for estimating uncollectible accounts. Sales for the year totaled $112,000. Company X has assessed uncollectible accounts at 10% of sales. The company recorded $11,200 of bad debt expense. Write-offs for the period were $3,000. What is the effect of this transaction?

a. Net income is overstated by 3,000

b. None of the these

c. Bad debt expense is overstated by 3,000

d. Cost of Goods sold is understated by 3,000

Solutions

Expert Solution

Bad Debts Expenses: In this method as per agreed percentage of uncollectable. We can debit the expenses as a bad debts expenses

In the given question total Sales is $ 112,000 and estimated uncollectable is 10%. So entry of the same is passed as below,

Bad Debt Expenses                              Debit $ 11,200

Allowance for Doubtful Accounts      Credit $ 11,200

Accountant also write of the bad debts of $ 3,000. Write off the entry is done as below due to first year and no balance available in allowance accounts

Bad Debt Expenses                               Debit $ 3,000

Account Receivable                              Credit $ 3,000

So as per the above it means bad debts is recorded in allowance method also recorded at the time of write off also

Answer = Option C = Bad debt expense is overstated by 2,000

ekkarill92 answered 1 year ago
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