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Chapter 7

MGT 11A Chapter 7: CHAPTER 7 -pt2


Department
Management
Course Code
MGT 11A
Professor
John Hancock
Chapter
7

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ESTIMATING BAD DEBTS
Percent of Sales Method: assumes that a percent of credit sales for the period in
uncollectible
Ex: Musicland estimates 0.6% of credit sales to be uncollectible.
Musicland has credit sales of $400,000 in 2018.
Percent of Receivables Method: assumes that a percent -based on experience
and economic trends- of a company’s receivables is uncollectible
Ex: assume Musicland has $50,000 of accounts receivable on December
31, 2018. It estimates 5% of its receivable is uncollectible. This means that
after the adjusting entry is posted, we want the Allowance for Doubtful
Accounts to show a $2,500 credit balance
Aging of Receivables Method: several percentages are used to estimate
allowance
Each receivable is classified by how long it is past its due date
assumption that the longer an amount is past due, the more likely it
is uncollectible
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