Question

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 $30,000 $432,000 During 2018, credit sales were $1,750,000, cash collections from customers $1,830,000, and $35,000 in accounts receivable were written off. In addition, $3,000 was collected from a customer whose account was written off in 2017.

An aging of accounts receivable at December 31, 2018, reveals the following: Percentage of Year-End Percent Age Group Receivables in Group Uncollectible

0–60 days 65 % 4 %

61–90 days 20% 15%

91–120 days 10% 25%

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: Bad debt expense is estimated to be 3% of credit sales for the year. 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. 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?

Answer 1

Solution 1:

Journal Entry 1 - Raintree Cosmetic Company
Event	Particulars	Debit	Credit
1	Allowance for doubtful accounts Dr	$35,000.00
	To Accounts receivables		$35,000.00
	(To written of accounts receivables)
2	Accounts receivables Dr	$3,000.00
	To Allowance for doubtful accounts		$3,000.00
	(To reinstate account previously written off)
3	Cash Dr	$3,000.00
	To Accounts receivables		$3,000.00
	(To record collection of accounts previously written off)

Solution 2:

Balance in accounts receivables at the end of 31.12.2018 = Beginning balance + Credit sales - Write off - Collections

= $462,000 + $1,750,000 - $1,830,000 - $35,000 = $347,000

Existing balance in allowance for doubtful accounts = $30,000 - $35,000 + $3,000 = = $2,000 Debit

Computation of Allowance for Uncollectible Accounts
Ageing	% of year end receivables in Group	Accounts Receivables	% Uncollectible	Required Allowance
0-60 days	65%	$225,550.00	4%	$9,022.00
61-90 days	20%	$69,400.00	15%	$10,410.00
91-120 days	10%	$34,700.00	25%	$8,675.00
Over 120 days	5%	$17,350.00	40%	$6,940.00
Total		$347,000.00		$35,047.00

Journal Entry 2 - Raintree Cosmetic Company
Event	Particulars	Debit	Credit
a	Bad debts Expense Dr ($1,750,000*3%)	$52,500.00
	To Allowance for doubtful accounts		$52,500.00
	(To record bad debts expense)
b	Bad debts Expense Dr ($347,000*10% + $2,000)	$36,700.00
	To Allowance for doubtful accounts		$36,700.00
	(To record bad debts expense)
c	Bad debts Expense Dr ($35,047 + $2,000)	$37,047.00
	To Allowance for doubtful accounts		$37,047.00
	(To record bad debts expense)

Solution 3:

Net amount of accounts receivables reported in 2018 balance sheet = Gross receivables - Allowance for doubtful accounts

a. Net receivables = $347,000 - ($52,500 - $2,000) = $296,500

b. Net receivables = $347,000 - $34,700 = $312,300

c. Net receivables = $347,000 - $35,047 = $311,953