Calistoga Produce estimates bad debt expense at 0.60% of credit sales. The company reported accounts receivable and allowance for uncollectible accounts of $481,000 and $1,520 respectively, at December 31, 2026. During 2027, Calistoga's credit sales and collections were $315,000 and $311,000, respectively, and $1,860 in accounts receivable were written off.

Calistoga's 2027 bad debt expense is:

Question

Calistoga Produce estimates bad debt expense at 0.60% of credit sales. The company reported accounts receivable and allowance for uncollectible accounts of $481,000 and $1,520 respectively, at December 31, 2026. During 2027, Calistoga's credit sales and collections were $315,000 and $311,000, respectively, and $1,860 in accounts receivable were written off.

Calistoga's 2027 bad debt expense is:

BlackTom AI · Accepted Answer

Question restatement:
Calistoga Produce estimates bad debt expense at 0.60% of credit sales. Beginning balances: accounts receivable = 481,000 and allowance for uncollectible accounts = 1,520 at December 31, 2026. In 2027, credit sales = 315,000, collections = 311,000, and $1,860 of accounts receivable were written off.
Question options:
- $2,035.
- $1,820.
- $1,890.
- $1,965.

Now, step through each answer choice and explain why it is correct or incorrect.
Option 1: $2,035.
To evaluate this, we compute the bad debt expense under the company policy of 0.60% of credit sales for 2027, which is 315,000 × 0.006 = 1,890. The policy provides the amount of bad debt expense recognized for the period. However, we must also consider how the allowance account is affected by write-offs and the starting balance. Beginning allowance = 1,520. Add bad debt expense = 1,890. Subtract actual write-offs during 2027 = 1,860. Ending allowance = 1,520 + 1,890 − 1,860 = 1,550. Since ending allowance is determined by these movements, not by an alternative target, 2,035 does not align with the 1,550 ending allowance and is therefore incorrect.
Option 2: $1,820.
This would imply a different bad debt expense amount. If we tried 1,820 as bad debt expense, ending allowance would be 1,520 + 1,820 − 1,860 = 1,480. While this is a plausible ending balance, it does not match the prescribed policy of 0.60% of credit sales (1,890). The discrepancy indicates this choice misapplies the policy or miscomputes the effect of the movements in the allowance, so this option is inaccurate.
Option 3: $1,890.
This value directly corresponds to 0.60% of 315,000 (credit sales): 315,000 × 0.006 = 1,890. It represents the expense recognized under the stated policy. When combined with the starting allowance and the actual write-offs, the ending allowance becomes 1,550, but the question asks for the bad debt expense amount, which is 1,890. Therefore, this option correctly reflects the policy-based expense for 2027.
Option 4: $1,965.
If bad debt expense were 1,965, ending allowance would be 1,520 + 1,965 − 1,860 = 1,625. This again fails to align with the policy calculation of 1,890 and introduces an inconsistency between the expense recognized and the required methodological calculation. Thus, this choice is not correct.
Summary of reasoning:
- The company’s policy sets bad debt expense for 2027 at 0.60% of credit sales: 315,000 × 0.006 = 1,890, which is option 3.
- While the movements in the allowance (beginning balance, write-offs, and the resulting ending balance) must be reconciled, the question asks specifically for the bad debt expense amount derived from the policy, not for the ending allowance balance. The remaining options either misapply the policy or incorrectly alter the expense amount to produce a different ending allowance, making them incorrect.

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