Question

At the end of Yong's first year of business, he had been owed $70,000 and believed he would collect all but $3,000 of it. It is now the end of his second year of business. He is owed $90,000. Of that amount, $2,000 is from a customer who has told Yong the watches were stolen and they are not sure if they can pay. They are waiting to find out if their insurance will cover it. Yong does not know of any other specific amounts, but said that he expanded into a bunch of new markets, so he is worried that about $5,000 more may not pay.

What amounts should he show on his balance sheet for receivables and on his income statement as an expense for his second year financial statements?

Answer 1

Answer:-

Amount of Receivable to be reported on the Balance sheet= $83,000

Amount to be reported on the Income statement as an expense (Bad debts Expense)=$4,000

Amount of Receivable to be reported on the Balance sheet:

Unadjusted Receivable Balance in Year 2 --$90,000

Less: Amounts written off----------------------($2,000)

Adjusted Receivable Balance in Year 2-------$88,000

Less: Allowance for Doubtful accounts------($5,000)

Net Realizable Receivable ----------------------$83,000

Amount of Receivable to be reported on the Balance sheet= $83,000

Balance at the end of the First year are the Beginning balances for the second year: Beginning Balance Receivables of $70,000 and Beginning Balance Allowance for Doubtful accounts $3,000

To record Receivables that will not collected: Debit,(Decrease) Allowance for Doubtful debts by $2,000 and Credit(Decrease), Accounts Receivable by $2,000

The $5,000 is the estimated balance that should now be maintained in the Allowance for Doubtful accounts, thus, the adjustment to record the Bad debts Expense in year 2:

Bad debts Expense=$5,000 -($3,000-$2,000)

Bad debts Expense=$5,000 -$1,000=$4,000