Question

Slide 22-12

Raintree Cosmetic Company sells its products to customers on a credit basis. An adjusting entry for bad debt expense is recorded only at December 31, the company’s fiscal year-end. The 2017 balance sheet disclosed the following:

Current assets;

          Receivables, net of allowance for uncollectible accounts of $33,000                $447,000

During 2018, credit sales were $1,765,000, cash collections from customers $1,845,000, and $38,000 in accounts receivable were written off. In addition, $3,300 was collected from a customer whose account was written off in 2017. An aging of accounts receivable at December 31, 2018, reveals the following:

                                     

Age Group	Percentage of Year-End Receivables in Group	Percent Uncollectible
0-60 days	70%	5%
61-90 days	20	15
91-120	5	20
Over 120 days	5	40

Required:

1. Prepare summary journal entries to account for the 2018 write-offs and the collection of the receivable previously written off.
2. Prepare the year-end adjusting entry for bad debts according to each of the following situations:

1. Bad debt expense is estimated to be 4% of credit sales for the year.
2. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable.
3. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is determined by an aging of accounts receivable.

3. For situations (a)-(c) in requirement 2 above, what would be the net amount of accounts receivable reported in the 2018 balance sheet?

Complete the following questions by entering your answers below.

1. Prepare summary journal entries to account for the 2018 write-offs and the collection of the receivable previously written off. (If no entry is required for a transaction/event, write “No journal entry required” in the first account title.

1. Record accounts receivable written off during the year 2018.
2. Record entry to reinstate an account receivable previously written off.
3. Record collection of an account receivable previously written off.

2. Prepare the year-end adjusting entry for bad debts.

1. Bad debt expense is estimated to be 4% of credit sales for the year.
2. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable.
3. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is determined by an aging of accounts receivable.

Note: Enter debits before credits.

Event	General Journal	Debit	Credit

Net account receivable reported

a.______________________

b.______________________

c.______________________

Answer 1

Working Note: 1

Account Receivables Account
Particulars	Debit Amount	Particulars	Credit Amount
Balance B/F	447000	Cash	1845000
Sales	1765000	Bad debt W/o	38000
		Balance C/F	329000
	2212000		2212000

Working Note :2

Situation 1: Bad debt is 4% of credit sales: 17,65,000*4%= 70,600

Situation 2: Bad debt is 10% of year end balance: 3,29,000*10%= 32,900

Situation 3: Bad debt is computed based on ageing:

Age Group	Percentage of Year-End Receivables in Group	Percent Uncollectible	Computation	Amount
0-60 days	70%	5%	329000*70%*5%	11515
61-90 days	20	15	329000*20%*15%	9870
91-120	5	20	329000*5%*20%	3290
Over 120 days	5	40	329000*5%*40%	6580
Total				31255

Working Note 3:

Situation	Opening Allowance for Uncollecible Account	Allowance for the current year	Adjustment amount
1	33000	70,600	37,600
2	33000	32900	-100
3	33000	31255	-1,745

MAIN ANSWER

1. Journal Entries

Journal No	Date	Particulars	Debit Amount	Credit Amount
a	31/12/2018	Bad debt written off account	38000
		To Account Receivable Account		38000
		(Being written off entry passed)
	31/12/2018	Profit and Loss Account	38000
		To Bad debt written off account		38000
		(Being Allowance for Uncollectible Account transferred to Profit and Loss account)
b		No entry required to be passed.
		Because, collection of account receivable previously written off will be directly credited to other income instead of adjusting against the Account Receivables.
c	31/12/2018	Bank Account	3300
		To other income acccount		3300
		(Being collection of account receivable previously written off received and accounted)

2. Year End Adjusting Entry

Situation	Journal No	Date	Particulars	Debit Amount	Credit Amount
1	1	31/12/2018	Allowance for Uncollectible Account	37,600
			To Account Recievable Account		37,600
			(Being Allowance for Uncollectible Account created)
	2	31/12/2018	Profit and Loss Account	37,600
			To Allowance for Uncollectible Account		37,600
			( Being Allowance for Uncollectible Account transferred to Profit and loss account)
2	1	31/12/2018	Account Recievable Account	100
			To Allowance for Uncollectible Account		100
			(Being excess Allowance for Uncollectible Account written back)
	2	31/12/2018	Allowance for Uncollectible Account	100
			To Profit and Loss Account		100
			( Being Allowance for Uncollectible Account transferred to Profit and loss account)
3	1	31/12/2018	Account Recievable Account	1,745
			To Allowance for Uncollectible Account		1,745
			(Being excess Allowance for Uncollectible Account written back)
	2	31/12/2018	Allowance for Uncollectible Account	1,745
			To Profit and Loss Account		1,745
			( Being Allowance for Uncollectible Account transferred to Profit and loss account)