Question

Penny Cookie Company offers credit terms to its customers. At the end of Year 1, accounts receivable totaled $120,000. The allowance method is used to account for uncollectible accounts. The allowance for uncollectible accounts had a credit balance of $12,000 at the beginning of Year 1 and $6,200 in receivables were written off during the year as uncollectible. Also, $600 in cash was received in December from a customer whose account previously had been written off. The company estimates bad debts by applying a percentage of 6% to accounts receivable at the end of the year.

1. Prepare journal entries to record the write-off of receivables, the collection of $600 for previously written off receivables, and the year-end adjusting entry for bad debt expense.

2. How would accounts receivable be shown in the Year 1 year-end balance sheet?

Answer 1

Solution 1:

Journal Entries - Penny Cookie Company
S.no.	Particulars	Debit	Credit
a.	Allowance for Doubtful Accounts Dr	$6,200
	To Accounts Receivable		$6,200
	(To record write off of uncollectible account)
b.	Accounts Receivable Dr	$600
	To Allowance for Doubtful Accounts		$600
	(To reinstate account written off earlier)
c.	Cash Dr	$600
	To Accounts Receivable		$600
	(To record amount collected)
d.	Bad debt expense Dr [($120,000-$6200)*6% - $12000+$6200-$600]	$428
	To Allowance for Doubtful Accounts		$428
	(To record year end bad debt expense)

Solution 2:

Balance Sheet
For the Year 1
Accounts Receivable ($120,000-$6200)	$1,13,800
Less: Allowance for Doubtful Accounts ($113800*6%)	$6,828
Accounts receivable, Net		$1,06,972