West Company had the following account balances at December 31, 2016, before recording bad debt expense for the year: Accounts receivable $ 900,000 Allowance for uncollectible accounts (credit balance) 16,000 Credit sales for 2016 1,750,000 West is considering the following methods of estimating bad debts for 2016: ⢠Based on 2% of credit sales ⢠Based on 5% of year-end accounts receivable What amount should West charge to bad debt expense at the end of 2016 under each method? Percentage of Credit Sales Percentage of Accounts Receivable Multiple Choice $35,000 $29,000 $35,000 $45,000 $51,000 $29,000 $51,000 $45,000

Business · College · Tue Nov 03 2020

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To calculate the bad debt expense for West Company at the end of 2016, we will use both methods and see the resulting amount for each.

1. Percentage of Credit Sales Method: 

This method estimates bad debts based on a percentage of the total credit sales during the year. According to the information, West Company has credit sales of $1,750,000 for 2016. Using the percentage of 2%: 

Bad Debt Expense = 2% of Credit Sales 

Bad Debt Expense = 2% * $1,750,000 

Bad Debt Expense = 0.02 * $1,750,000 

Bad Debt Expense= $35,000

So, using the percentage of credit sales method, West Company should charge $35,000 to bad debt expense at the end of 2016.

2. Percentage of Accounts Receivable Method: 

This method estimates bad debts based on a percentage of the ending accounts receivable balance. The year-end accounts receivable for West Company is $900,000. Using a percentage of 5%: 

Bad Debt Expense = 5% of Accounts Receivable B

ad Debt Expense = 5% * $900,000 

Bad Debt Expense = 0.05 * $900,000

 Bad Debt Expense = $45,000

However, in this method, we must consider the existing balance in the Allowance for Uncollectible Accounts. Since there's already a credit balance of $16,000, we will need to adjust the bad debt expense based on this existing balance. Essentially, we are estimating that $45,000 of the accounts receivable will not be collectible, but we already have $16,000 accounted for. Thus, we need an additional: 

Required Bad Debt Expense = Estimated Uncollectible Accounts - Existing Allowance Balance

Required Bad Debt Expense = $45,000 - $16,000 

Required Bad Debt Expense = $29,000

So, using the percentage of accounts receivable method, West Company should charge an additional $29,000 to bad debt expense for 2016 to maintain the appropriate balance in the allowance account.

Therefore, the amounts to be charged to bad debt expense under each method are: $35,000 under the Percentage of Credit Sales Method. $29,000 under the Percentage of Accounts Receivable Method.

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