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 $49,000	$	527,000

During 2018, credit sales were $1,845,000, cash collections from customers $1,925,000, and $58,000 in accounts receivable were written off. In addition, $4,900 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	60	%	3	%
61–90 days	10		5
91–120 days	20		25
Over 120 days	10		45

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 2% 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

Req 1.
Journal entries:
S.no.	Accounts title and explanations				Debit $	Credit $
a.	Allowance for uncollectible accounts Dr.				58000
	Accounts receivable					58000
b.	Accounts receivable Dr.				4900
	Allowance for Uncollectible accounts					4900
	Cash account Dr.				4900
	Allowance for uncollectible accounts					4900
Req 2.
Adjusting entry:
Case-a
	bad debts expense Dr. (1845000*2%)				36900
	Allowance for uncollectible accounts					36900
Case-b
	Bad debts expense Dr.				47900
	Allowance for uncollectible accounts					47900
Note:
Accounts receiivable			576000
Add: Credit sales			1845000
Less: Collections			-1925000
Less: Amount written off			-58000
Accounts receivable balance			438000
Required balance of Allowance			43800	(438000*10%)
Allowance balance			49000
Less: Amount written off			-58000
Add: Reinstated amount			4900
Debit balance of allowance			4100
Required balance of allowance			43800
Bad debts expense			47900
Case-c
	Bad debts expense Dr.			55784
	Allowance for uncollectible accounts				55784
Note:
Estimated balance of Allowance:
Age		AR	% Uncollectible		Estimated Uncollectible
0-60		262800	3%		7884
61-90		43800	5%		2190
91-120		87600	25%		21900
Over 120 days		43800	45%		19710
		438000			51684
Required balance of allowance				51684
Add: Debit balance of allowance				4100
bad debts expense				55784
Req 3.
Case-A:
Accounts receivable (Gross)			438000
Less:Allowance for uncollectible			32800
	(36900-4100)
Accounts receivable (Net)			405200
Case-B
Accounts receivable (gross)			438000
Less: Allowance			43800
Accounts receivable (Net)			394200
Case-C
Accounts receivable (gross)			438000
Less: Allowance			51684
Accounts receivable (Net)			386316