During the year, Carlton Company had net credit sales of $ 40 , 000. At the end of the year, before adjusting entries, the balance in Accounts Receivable was $ 15 , 000 (debit) and the balance in Allowance for Bad Debts was $ 670 (credit). If the company uses an income statement approach to estimate bad debts at 4%, what is the ending balance in the Allowance for Bad Debts account?

In the question it is told to use income statement approach which is also know as percentage of sales method , we can use this approach to take out the bad debt expenses for the year ending by using the formula -

Bad debt expenses = Total credit sales X Estimated bad debt percentage

= $40,000 x 4%

= $1600

Now by adding this bad debt expense with the credit balance in accounts receivables , we will get the year ending balance in allowance for bad debts account.

ALLOWANCE FOR BAD DEBT ACCOUNTS =

Bad debt expenses + Credit balance in allowance for bad debt

= $1600 + $670

=$2270

stokholm stokholm · Answer 2 · 2019-07-31T12:15:57+02:00

Answer:

Ending balance in the Allowance for Bad Debts account = $1,600

Explanation:

Company's net credit sales for the period = $40,000

Balance of Accounts Receivable = $15,000

Existing balance of Bad Debts = $670

Bad Debts = 4%

Now bad debts = $15,000 X 4% = $600

But the company uses income statement approach which means bad debts on credit sales = $40,000 X 4% = $1,600

Already existing balance = $670

Thus ending balance shall be $1,600

Amount to be added to bad debts allowance = $1,600 - $670 = $930

Note: This is because company follows Income statement approach, otherwise bad debts allowance shall be $600 only based on closing accounts receivable.

Ending balance in the Allowance for Bad Debts account = $1,600