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Question A. J & B Company uses the percentage of sales approach to estimate its uncollectible...

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A. J & B Company uses the percentage of sales approach to estimate its uncollectible accounts. The company’s annual sales for its first financial year of operations ending July 31, 2020 was $500,000, cash sales contributed to 2% of the overall sales and the accounts receivable balance at year end was $75,000. Based on industry expectations, it estimated that 3% of its credit sales would be uncollectible.

Required:

a. Calculate the bad debt expense at July 31, 2020.

b. Calculate the net receivable balance that would be reported in the Statement of Financial Position as at July 31, 2020. (1 mark)

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Answer #1

Total Sales = $ 500,000

Cash Sales = $ 10,000 (5,00,000 * 2%)

Credit Sales = $ 4,90,000

So the receivables of the company is $ 490,000

3% of Credit Sales is uncollectible i.e bad debts = 3% of $ 4,90,000 = 14,700

a. Calculate the bad debt expense at July 31, 2020

Therefore, Bad-debt Expense at July 31, 2020 = $ 14,700

b. Calculate the net receivable balance that would be reported in the Statement of Financial Position as at July 31, 2020.

Net Receivables = Total Receivables - Bad debts

= $ 490,000 - $ 14,700

= $ 4,75,300

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