Question

At 31 December 2016, the trial balance of ABC Ltd contained the following amounts before adjustment:

                                                                        Debits                          Credits

                        Accounts Receivable                  $400 000

                        Allowance for Doubtful Debts                                        $5 200

                        Sales                                                                            $950 000

Required:

(1) Based on the information given which method of accounting for bad debts is ABC Ltd using—the direct write-off method or the allowance method, and why?

(2) Prepare the adjusting entry at 31 December 2016 for bad debts expense assuming that the ageing schedule indicates that $10 500 of accounts receivable will be uncollectable.

(3) Repeat (2) assuming that instead of a credit balance, there is a $1000 debit balance in the Allowance for Doubtful Debts before the adjusting entry.

(4) During the next month, January 2017, a $2 000 account receivable is written off as uncollectable. Prepare the journal entry to record the write-off.

Answer 1

Requirement (1) Based on the information given which method of accounting for bad debts is ABC Ltd using—the direct write-off method or the allowance method, and why?

Solution:- Based on the given informaton, We can identified that Company D is using Allowance Method to record Bad debts.

Requirement (2) Prepare the adjusting entry at 31 December 2016 for bad debts expense.

Assuming that the ageing schedule indicates that $10 500 of accounts receivable will be uncollectable.

Account Titles and Explanation	Debit	Credit
Bad Debts expense	$5,300
Allowance for doubtful accounts		$5,300
($10,500 - $5,200)

Requirement (3) Repeat (2) assuming that instead of a credit balance, there is a $1000 debit balance in the Allowance for Doubtful Debts before the adjusting entry.

Account Titles and Explanation	Debit	Credit
Bad Debts expense	$11,500
Allowance for doubtful accounts		$11,500
($10,500 + $1,000)

Requirement (4) During the next month, January 2017, a $2 000 account receivable is written off as uncollectable. Prepare the journal entry to record the write-off.

Account Titles and Explanation	Debit	Credit
Allownace for Doubtful accounts	$2,000
Account Receivable		$2,000