5. Gladson Corporation accrues bad debt expense using the percentage of sales method. At the end of the year, Gladson has $450,000 in accounts receivable and $4,000 in its allowance for doubtful accounts before any entry is made for bad debts. Sales for the year were $1,900,000. The percentage that Gladson has historically used to calculate bad debts is 1 percent of sales. Which of the following is true?
a. Gladson’s bad debt expense for the year is $500.
b. The percentage of sales method is designed to achieve an accurate balance sheet presentation of the net realizable value of accounts receivable.
c. Gladson would report an allowance for doubtful accounts of $23,000.
d. Gladson would need to make an adjustment because the $4,000 remaining balance in the allowance for doubtful accounts indicates they estimated wrong last year.
6. Darlene Corporation has $300,000 in assets, 30 percent of which are current, and $100,000 in liabilities, 40 percent of which are current. Which of the following is true?
a. Darlene’s current ratio is 3 to 1.
b. Darlene’s working capital is $200,000.
c. Darlene’s working capital is $50,000.
d. The current ratio and working capital are measures of a company’s profitability.
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