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Under the percent-of-sales method, credit sales last year were $400,000 and 2% are expected to default. The Allowance for receivables already has a $600 credit balance. What is the adjusting entry amount?
A$8,000
B$7,400
C$8,600
D$600
Answer & Solution
Correct answer: A. $8,000
1. Percent of sales bases the entry on sales, not on a target balance.
2. Estimate = $$\$400{,}000 \times 2\% = \$8{,}000$$
3. The full $8,000 is recorded and simply added to any existing balance, so the entry is $8,000.
4. $7,400 and $8,600 net against the balance, which is the analysis-of-receivables logic, not this method.
5. $600 is only the carryover balance, not the entry. All distractors are wrong.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.4 "Allowance Method - Percent of Sales", p.144_
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