Doer Company reports year-end credit sales in the amount of ...

Doer Company reports year-end credit sales in the amount of $\$ 390,000$ and accounts receivable of $\$ 85,500 .$ Doer uses the income statement method to report bad debt estimation. The estimation percentage is 3.5$\% .$ What is the estimated balance uncollectible using the income statement method? A. $\$ 13,650$ B. $\$ 2,992.50$ C. $\$ 136,500$ D. $\$ 29,925$

Doer Company reports year-end credit sales in the amount of $\$ 390,000$ and accounts receivable of $\$ 85,500 .$ Doer uses the income statement method to report bad debt estimation. The estimation percentage is 3.5$\% .$ What is the estimated balance uncollectible using the income statement method?
A. $\$ 13,650$
B. $\$ 2,992.50$
C. $\$ 136,500$
D. $\$ 29,925$

Key Concepts

Income Statement Method

The Income Statement Method estimates bad debt expense based on a percentage of credit sales rather than the accounts receivable balance. This approach focuses on determining the expense directly in the period when the related revenue is earned, matching expenses with revenues in accordance with the accrual basis of accounting.

Credit Sales

Credit sales refer to sales transactions where the payment is deferred and recorded as accounts receivable. These sales are used as the base for calculating bad debt expense in the income statement method, as they represent the revenue that was generated on credit and may not all result in cash collections.

Estimation Percentage

The estimation percentage is the predetermined rate applied to the total credit sales to calculate the expected amount of bad debts. This percentage reflects historical experience or industry averages and provides a systematic way to estimate the expense of uncollectible accounts in the period in which the revenue is recognized.

Bad Debt Expense Estimation

Bad Debt Expense Estimation involves calculating an allowance for doubtful accounts by applying the estimation percentage to credit sales. This practice ensures that potential credit losses are anticipated and recorded in the same period as the related revenue, thereby adhering to the matching principle in accounting.

Transcript

00:01 Okay, so we will understand the meaning of credit sale, okay? however, we will understand.

00:11 First of all, we will write the definition, followed by that, we will take an example, okay? that how does an entity estimate the non -collectable balance for the financial year on different methods, okay, on the basis of different methods? so it is the amount of sale, okay, which is not collected.

00:56 Immediately so we have written a very small definition however we will understand that what is the meaning of this definition through an example so let's suppose there is mr.

01:13 A who is a business owner who deals in furniture there's mr.

01:20 C who is a customer okay so mr.

01:29 A sold some goods of five hundred dollars to mr.

01:38 C now mr.

01:39 C is a trustworthy customers to mr.

01:41 A and mr.

01:41 C said that i will pay you in later point in time let's say within two months okay within two months mr.

01:50 C will pay to mr.

01:54 A okay so that sale will be known as this is the example of credit sale okay however what happens when there is a credit sale so there becomes a balance of creditors balance of debtors so in that case mr c is a debtor to mr a okay for how much for 500 dollars now mr a follows a practice okay mr a follows a practice of estimation okay of non -collectable balance let's suppose mr a has credit sale now we have understood the method meaning of credit sale so we will take example from that perspective that perspective.

02:56 So let's say credit sale has been generated by mr.

02:59 A for the current financial year is $10 ,000...

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