When the Percentage of Sales method is used, the estimated bad debt expense is calculated by
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A. B. C. D.Explanation
This method bases the period adjustment on a percent of net sales on account for the period.
The Percentage of Sales method is a common approach used to estimate the bad debt expense. It involves estimating the amount of sales on account that are likely to become uncollectible based on historical data or industry averages.
According to the question, we need to determine how the estimated bad debt expense is calculated using the Percentage of Sales method. Let's go through each answer choice and see which one is correct.
A. Dividing total sales on account by the percentage: This answer choice suggests that we divide the total sales on account by the percentage to calculate the estimated bad debt expense. However, this approach is incorrect because it doesn't take into account the percentage of uncollectible accounts or the allowance for uncollectible accounts. Therefore, option A is not the correct answer.
B. Subtracting the percentage of net sales on account from the balance of allowance for uncollectible accounts: This answer choice involves subtracting the percentage of net sales on account from the balance of the allowance for uncollectible accounts. This approach is not aligned with the Percentage of Sales method. The allowance for uncollectible accounts represents the estimated amount of accounts receivable that will not be collected, but it doesn't directly determine the bad debt expense. Therefore, option B is not the correct answer.
C. Multiplying total sales on account times the percentage: This answer choice suggests that we multiply the total sales on account by the percentage to calculate the estimated bad debt expense. This approach aligns with the Percentage of Sales method. By multiplying the total sales on account by the percentage, we estimate the portion of sales that is expected to be uncollectible. Therefore, option C is a plausible choice for the correct answer.
D. Multiplying net sales on account times the percentage: This answer choice involves multiplying the net sales on account by the percentage to calculate the estimated bad debt expense. This approach is incorrect because it uses net sales on account instead of total sales on account. The net sales on account represent the sales after deducting sales returns, allowances, and discounts, which may not be the appropriate base for estimating bad debt expense. Therefore, option D is not the correct answer.
Based on the analysis above, the most appropriate answer is option C: multiplying total sales on account times the percentage. This method provides an estimate of the bad debt expense by considering the total sales on account and applying a percentage to estimate the uncollectible portion of those sales.