MGT 11A Chapter 7: CHAPTER 7 -pt2
Course CodeMGT 11A
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ESTIMATING BAD DEBTS
● Percent of Sales Method: assumes that a percent of credit sales for the period in
■ 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
○ 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
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