Question

DB’s Doughnuts creates delicious up-scale pastries for different events in the Tampa Bay area, and makes all sales on credit. As of December 31^st, 2020, the company’s sales information and accounts receivable information is as follows (normal balances before adjustments):

Accounts receivable                                        $365,000

Allowance for Doubtful Accounts                 $12,000

1. DB’s Doughnuts currently estimates that 12% of its accounts receivable will be uncollectible. Calculate and prepare the adjusting entry for the company’s bad debt expense as of 12/31/20.

DATE	ACCOUNT	DEBIT	CREDIT

DB’s Doughnuts’ controller decided to re-evaluate the bad debt adjustment, and prepared an aging of the accounts receivable account as follows:

Accounts Receivable Aging	Amount	% Deemed Uncollectible
0-30 days old	$150,000	2%
31-60 days old	$136,000	10%
61-90 days old	$56,500	25%
Over 90 days	$23,000	85%

2. Calculate and prepare the adjusting entry for the company’s bad debt expense as of 12/31/20 (using the new approach, of aging the accounts receivable)

3. Using the new approach, what is the company’s net realizable value of receivables?

Answer 1

Answer 1)

Calculation of bad debts expense for the year ended December 31^st, 2020

Date	Account	Debit	Credit
December 31st, 2020	Bad debts expense	$ 31,800
	Allowance for doubtful accounts		$ 31,800
	(To record bad debts expense for the year)

Working Note:

Calculation of bad debts expense for the year

Bad debts expense = (Accounts receivable X Estimated percentage of uncollectible accounts) – Allowance for Doubtful Accounts

                                                   = ($ 365,000 X 12%) - $ 12,000

                                                    = $ 31,800

Answer 2)

Calculation of bad debts expense for the year ended December 31^st, 2020

Date	Account	Debit	Credit
December 31st, 2020	Bad debts expense	$ 38,275
	Allowance for doubtful accounts		$ 38,275
	(To record bad debts expense for the year)

Working Note:

Calculation of bad debts expense for the year:

Accounts Receivable Ageing	Amount	% Deemed Uncollectible	Estimated amount of Uncollectible accounts
0-30 days old	$     150,000	2%	$                             3,000
31-60 days old	$     136,000	10%	$                           13,600
61-90 days old	$        56,500	25%	$                           14,125
Over 90 days	$        23,000	85%	$                           19,550
Total	$                           50,275

Bad debts expense = Estimated amount uncollectible accounts – Allowance for Doubtful Accounts

                                   = $ 50,275 - $ 12,000

                                     = $ 38,275