Aint John Industries uses the percentage of credit sales method to estimate Bad Debt Expense. The company reported net credit sales of $500,000 during the year. Saint John has experienced bad debt losses of 3% of credit sales in prior periods. At the beginning of the year, Saint John has a credit balance in its Allowance for Doubtful Accounts of $4,000. No write-offs or recoveries were recorded during the year. What amount of Bad Debt Expense should Saint John recognize for the year

$15,000

Explanation:

Bad Debt Expense for the year=$500,000*3%=$15,000

As per %of Sales Method, the Relevant % of sales is recorded bad debt expense. Therefore the opening balance of allowance for doubtful accounts given in the question is irrelevant.

The journal entry will be;

Bad Debt expense      Dr.$15,000

Allowance for Doubtful Accounts Cr.$15,000

$15,000

Explanation:

When we are estimating bad debts as a percentage of credit sales then bad debt expense to be recognised each year is calculated by the formula

Total Credit Sales x Percentage of bad debts

As per data given in the question the Total Credit Sales = $500,000 and Percentage of bad debts is 3%.

Therefore Bad debt expenses to be recognised for the year by Saint John Industries would be

$500,000 x 3%

$15,000.

The Journal Entry to record the above transaction is

Bad Debt Expense $15,000

Allowance for Doubtful Accounts $15,000

answer a is correct answer

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