D is corrent. When doubtful accounts expense is estimated based on sales, any balance in the allowance account is ignored when computing the expense. The formula to determine the expense is| (Net sales) | × | (Bad debt rate) | = | Expense | | $1,750,00 | × | 2% | = | $35,000% |
When doubtful accounts expense is estimated based on accounts receivable, the balance in the allowance account must be considered. This is correct because the formula is used to compute the desired ending balance in the allowance account, not the doubtful accounts expense.| (Accts. Receivable) | × | (Bad debt rate) | = | Allowance | | × | 5% | = | $45,000 |
Since the allowance account already has a credit balance of $16,000, doubtful accounts expense of $29,000 must be recorded to bring the allowance up to $45,000 ($45,000 – $16,000 = $29,000).A is incorrect because under the percentage of credit sales, doubtful account expense would be $35,000 ($1,750,000 × 2%) and the beginning allowance account must be taken into consideration for the percentage of accounts receivable method.C is incorrect because under the percentage of credit sales, doubtful account expense would be $35,000 ($1,750,000 × 2%) and the beginning allowance account must be taken into consideration for the percentage of accounts receivable method. B is incorrect because under the percentage of credit sales, doubtful account expense would be $35,000 ($1,750,000 × 2%). |
