Question

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?

Select one:

a. Net income is overstated by 3,000

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

c. Bad debt expense is overstated by 3,000

d. None of the these

Answer 1

The Journal entry of the above transactions would be as follows
Bad Debt expenses($112,000*10%)	$                    11,200
Allowance for Doubtful accounts		$                11,200
(to bad debt expense recognised)
Allowance for Doubtful accounts	$                      3,000
Accounts Receivable		$                  3,000
(to account written off)
As you can see that the Bad debt expense has already beed debited by $11,200, But the actual amount written off is only $3,000
So it could be said that the Bad debt expense has been overstated by $8,200 and not $3,000
So Option D is answer