Question: Assume that this company chooses to use the percentage of sales method. All available evidence is
studied by officials who come to believe that 8 percent of credit sales made during Year Two will prove to be
worthless. In applying the percentage of sales method, what adjusting entry is made at the end of the year so that
financial statements can be prepared?
Answer: According to the general ledger, the company generated $400,000 in credit sales during Year Two. If
uncollectible accounts are expected to be 8 percent of that amount, the expense is reported as $32,000 ($400,000
× 8 percent). Bad debt expense (the figure estimated) must be raised from its present zero balance to $32,000.
This adjustment increases the expense to the appropriate $32,000 figure, the proper percentage of the sales figure.
However, the allowance account already held a $3,000 debit balance ($7,000 Year One estimation less $10,000
accounts written off). As can be seen in the T-accounts, the $32,000 recorded expense results in only a $29,000
balance for the allowance for doubtful accounts.
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