Smart Art is a new establishment. During the first year, there were credit sales of $40,000 and collections of credit sales of $36,000. One account for $650 was written off. The company decided to use the percent-of-sales method to account for bad debts expense, and use a factor of 2% for their year-end adjustment of bad debts expense. Prepare the entry to record the bad debt expense.

Answer:

Calculation of Year End Bad Debt Particulars Rate Total Credit Sales $40,000 Bad debt Expense (2%) $800 Bad Debt already written off $650 Bad debt to be written off $150 Journal Entry to write off the bad debt expense Bad Debt Expense     ---------Dr $150                     To, Allowance for Bad Debt   $150

Explanation 1: The company uses percent-of-sales method to account for bad debts expense and that percent is 2% So, the company should have accounted for 2% of total credit sales as bad debt expense. i.e 2% of $40,000 = $800 s bad debt expense

Explanation 2: But since the company has already written off $650, it now has to write off only the balance which is $150. Explanation 3: The journal entry to record the balance bad debt expense would be: Debit all expenses which is a debit to the bad debt expense of the company/ credit to the allowances account.

PFA