Ervin Company uses the allowance method to account for uncollectible accounts receivable. Bad debt expense is established as a percentage of credit sales. For 2021, net credit sales totaled $4,500,000, and the estimated bad debt percentage is 1.5%. No previously written-off accounts receivable were reinstated during 2021. The allowance for uncollectible accounts has a credit balance of $42,000 at the beginning of 2021 and $40,000, after adjusting entries, at the end of 2021.

Required:

a. What is bad debt expense for 2021?
b. Determine the amount of accounts receivable written off during 2021.
c. If the company uses the direct write-off method, what would bad debt expense be for 2021?

1)The estimated bad debt percentage is 1.5% of $4,500,000 =$ 67,500

2)Accounts Receivable Written Off     $ 69500

3) If direct method is used the amount of bad debts expense during the year 2021 would be $ 67,500

Explanation:

Ervin Company

For 2021, net credit sales totaled $4,500,000,

1)The estimated bad debt percentage is 1.5% of $4,500,000 =$ 67,500

Allowance for uncollectible accounts beginning  balance  $42,000 Cr

Add Bad Debts                           $ 67,500

Deduct  Allowance for uncollectible accounts ending balance $40,000

2)Accounts Receivable Written Off     $ 69500

This can also be determined using a T account

                               Beg Bal; $ 42,000

                              Bad debts 67,500

A/R written Off

69,500                                                

Balance $ 40,000                              

3) If direct method is used the amount of bad debts expense during the year 2021 would be $ 67,500

cognitive overload: having a lot on your mind impairs decision-making and tends to result in the simplest, but not necessarily best, option being selected.

empathy gaps: overlooking how you might feel in a different situation can result in unnecessary purchases, such as overbuying when shopping for food on an empty stomach.

optimism and overconfidence: wearing rose-tinted glasses and having unrealistic expectations about the future can affect money management and leave you unprepared for a change in circumstance.

instant gratification: seeking instant gratification drives impulsive spending and can undermine long-term planning and savings.

harmful habits: automatic or mindless behaviour can amplify a poor financial decision as it becomes a recurring event.

social norms: we are heavily influenced by the actions of others; while this can be in certain circumstances, it also contributes to the pressure to keep up with the joneses through conspicuous consumption.