16RQ - Horngren'S Financial And Managerial Accounting

Question

How does the percent-of-sales method compute bad debts expense?

Step-by-Step Solution

Answer

The formula used for the calculation of bad debt under the percent-of-sales method:

 $\mathrm{Bad} \mathrm{debt} \mathrm{expenses}=\mathrm{Net} \mathrm{credit} \mathrm{sales}\times \mathrm{estimated} \mathrm{percentage} \mathrm{of} \mathrm{bad} \mathrm{debts}$

Step 1: Definition of Bad Debt Expenses

A business entity’s expenses for reporting the accounts receivables that are uncollectible are known as bad debt expenses. Such expenses are deducted from the receivables. 

Step 2: Calculation of bad debts expenses using the percent of sales method

The business entity determines the bad debt expenses by taking the product of the net credit sales and the estimated percentage of bad debts. The estimated percentage depends upon the historical data on bad debts.