Chameleos C. made $4,000,000 in credit sales and has $600,000 of accounts receivable at the end of the period. They also have a credit balance of $4,200 in their allowance for doubtful accounts. Chameleos C0. believes that 3% of their accounts receivable will be uncollectable. What would they record as their bad debt expense for the period?
To calculate the bad debt expense for the period, we need to determine the estimated uncollectable amount of the accounts receivable.
Accounts Receivable = $600,000
Allowance for Doubtful Accounts = $4,200
The credit balance in the allowance for doubtful accounts represents the estimated uncollectable amount already accounted for. Therefore, the remaining uncollectable amount will be:
Uncollectable Amount = Accounts Receivable - Allowance for Doubtful Accounts
Uncollectable Amount = $600,000 - $4,200
Uncollectable Amount = $595,800
The company believes that 3% of their accounts receivable will be uncollectable. Hence, the estimated bad debt expense for the period will be:
Bad Debt Expense = Uncollectable Amount × Percentage
Bad Debt Expense = $595,800 × 0.03
Bad Debt Expense = $17,874
Therefore, Chameleos C. would record a bad debt expense of $17,874 for the period.
To calculate the bad debt expense for the period, follow these steps:
Step 1: Calculate the total estimated uncollectable amount.
Total estimated uncollectable amount = Total accounts receivable × Estimated percentage of uncollectable accounts
Total accounts receivable = $600,000
Estimated percentage of uncollectable accounts = 3% = 0.03
Total estimated uncollectable amount = $600,000 × 0.03 = $18,000
Step 2: Compare the total estimated uncollectable amount with the existing credit balance in the allowance for doubtful accounts.
Total estimated uncollectable amount ($18,000) > Existing credit balance ($4,200)
Step 3: Determine the increase in the allowance for doubtful accounts.
Increase in the allowance for doubtful accounts = Total estimated uncollectable amount - Existing credit balance
Increase in the allowance for doubtful accounts = $18,000 - $4,200 = $13,800
Step 4: Record the bad debt expense.
Bad debt expense = Increase in the allowance for doubtful accounts
Bad debt expense = $13,800
Therefore, Chameleos C. would record $13,800 as their bad debt expense for the period.