Question

The Hope Co. sells direct to retail customers and also to wholesalers. On January,
1, 2018 the balance of the retail accounts receivable was P418,000 while the allowance for bad debts with
respect to retail customers was a credit of P15,200.
The following summary pertains only to retail sales since 2015
Credit Sales - Bad Debts Written off - Bad Debts Recoveries
2015 - P2,220,000 P52,000 P4,300
2016 - 2,450,000 59,000 7,500
2017 - 2,930,000 60,000 7,200
2018 - 3,000,000 62,000 8,400
Bad debts are provided for as a percentage of credit sates. The accountant calculates the percentage annually
by using the experience of the three years prior to the current year. The formula is bad debts written off less
recoveries expressed as a percentage of the credit sales for the same period. Total collections from customers
amounted to P2,760,40. This amount included P50,000 for which the goods are to be delivered next year. During
the year. The company recorded the bad debts written off as bad debts expense
Based on the above and the result of your audit, answer the following:
1. The percentage to be used to compute the allowance for bad debt on December 31,2018 is
2. How much is the doubtful accounts expense for 2018?
3. The doubtful accounts expense for 2018 is overstated by
4. The ledger balance of the accounts receivable after necessary adjust on December 31, 2018 was a debit of
5. The ledger balance of the allowance for bad debts after necessary adjustments on December 31, 2018 was
a credit of

Answer 1

1. The percentage to be used to compute the allowance for bad debt on December 31,2018

Since, The accountant calculates the percentage annually by using the experience of the three years prior to the current year, for 2018 we will consider 2015, 2016 & 2017.

Allowance % = (Baddebt written off for 3 years-Recoveries in 3 years)/Credit Sales

= ((52,000+59,000+60,000)-(4,300+7,500+7,200) )/ (2,220,000+2,450,000+2,930,000)

Answer =0.02 or 2%.

2. How much is the doubtful accounts expense for 2018?

Doubtful accounts expense for 2018=2% of P3,000,000(CY Provision)-15200(Opening Credit of Provisions)= P44,800

3.The doubtful accounts expense for 2018 is overstated by P(60,000-(62,000-8,400))=P6,400.

4.The ledger balance of the accounts receivable after necessary adjust on December 31, 2018 was a debit of

Ledger Balance=418,000+3,000,000-(2,760,400-50,000)-2% of P3,000,000(CY Provision)

=P6,47,600

5.The ledger balance of the allowance for bad debts after necessary adjustments on December 31, 2018 was
a credit of

=15,200+44,800-(62,000-8,400)

=P6,400