Question

E8-3 Recording, Reporting, and Evaluating a Bad Debt Estimate Using the Percentage of Credit Sales Method [LO 8-2] During the year ended December 31, 2015, Kelly’s Camera Shop had sales revenue of $150,000, of which $75,000 was on credit. At the start of 2015, Accounts Receivable showed a $12,000 debit balance and the Allowance for Doubtful Accounts showed a $560 credit balance. Collections of accounts receivable during 2015 amounted to $64,000. Data during 2015 follow: a. On December 10, a customer balance of $1,300 from a prior year was determined to be uncollectible, so it was written off. b. On December 31, a decision was made to continue the accounting policy of basing estimated bad debt losses on 2 percent of credit sales for the year.

2. Show how the amounts related to Accounts Receivable and Bad Debt Expense would be reported on the balance sheet and income statement for 2015.

Answer 1

Kelly’s Camera Shop
Balance Sheet (Partial)
At December 31, 2015
Current Assets;
Accounts Receivable	$21700
Less: Allowance for Doubtful Accounts	($760)
Net Account Receivable	$20940

Kelly’s Camera Shop
Income Statement (Partial)
Year ending December 31, 2015
Operating Expenses;
Bad debt expense	$1500

Working Note;

1. Closing balance of accounts receivable will be as follow;

Opening balance $12000 + Credit sales $75000 – Collection $64000 – Write off $1300 = $21700

2. Closing balance of Allowance for Doubtful Accounts will be as follow;

Opening balance $560 + Bad debt expense $1500 – Write off $1300 = $760

3. Bad debt expense will be calculated as follow;

$75000 * 0.02 = $1500