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?

The ending balance in the allowance for bad debt account would be $2270.

Explanation:

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

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

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