Question

Apple Company has provided the following information prior to any year-end bad debt adjustment:

• Cash sales, $143,000

• Cost of sales, $188,000

• Sales returns and allowances, $34,000

• Sales discounts, $20,000

• Gross profit, $218,000

• Selling and administrative expenses, $43,000

• Net income, $32,000

• Increase in accounts receivable, $70,000

Apple estimates bad debt expense assuming that 1% of credit sales have historically been uncollectible. How much is Bishop’s bad debt expense? (a) $4,170 (b) $2,170 (c) $3,180 (d) $3,170

Answer 1

Answer: The correct answer is d i.e. $3,170

Net Sales = Gross Profit + Cost of Sales
Net Sales = $218,000 + $188,000
Net Sales = $406,000      

Total Sales = Net Sales + Sales Discounts + Sales Returns and Allowances
Total Sales = $406,000 + $20,000 + $34,000
Total Sales = $460,000

Credit Sales = Total Sales – Cash Sales
Credit Sales = $460,000 - $143,000
Credit Sales = $317,000

Estimated Uncollectible Account = Credit Sales *1 %
Estimated Uncollectible Account = $317,000 * 1%
Estimated Uncollectible Account = $3,170

Bad Debts Expense = Estimated Uncollectible Account
Bad Debts Expense = $3,170