Question

You are in the process of preparing the journal entries for Sailwork Services. Total sales revenue information for the year included credit sales of $270,000 and cash sales of $30,000. Sailwork Services uses the allowance method to measure bad debts.

Collections on account during the year were $260,000 and $500 of specific accounts receivable were identified as never being collectible as the customer had filed for bankruptcy.

Sailwork began the current year with an account receivable debit balance of $30,500 and an allowance for doubtful accounts debit balance of $100. The accounts receivable sub-ledger reveals the following aging at the end of the year:

Aged Accounts Receivable

                                           0-30 days    31-60 days      61-90 days      >90 days                    Total

A/R subtotals                     $17,000       $4,000               $2,400           $16,600                       $40,000

Estimated % uncollectible   1%                2%                     8%               40%                                 

1) Record the following journal entries for the year (explanations are not required):

1. All sales for the year                                                                                                                     (1 Mark)

2. Collection of account receivables                                                                                                 (1 Mark)

3. Bad debt expense using the percent of sales method based on 2.5% of credit sales were uncollectable.                                                                                                                                                     

4. Bad debt expense assuming the aging-of-receivables method was used instead of the percent of sales method.                                                                                                                                       

5. A/R from High Risk Corporation in the amount of $50 is determined not to be collectible.        (1 Mark)

Answer 1

Journal Entries:

	Account title and explanation	Debit	Credit
a	Accounts receivable	$270,000
	Cash	$30,000
	Sales revenue		$300,000
	[To record cash and credit sales]
b	Cash	$260,000
	Accounts receivable		$260,000
	[To record collections from customers]
c	Bad debt expense [270000 x 2.5%]	$6,750
	Allowance for doubtful accounts		$6,750
	[To record bad debt expense]
d	Bad debt expense [See note 1]	$7,732
	Allowance for doubtful accounts		$7,732
	[To record bad debt expense]
e	Allowance for doubtful accounts	$50
	Accounts receivable		$50
	[To record written off of uncollectible]

Note 1:

	0-30	31-60	61-90	90+	Total
Accounts receivable	$17,000	$4,000	$2,400	$16,600	$40,000
x % of uncollectibles	1%	2%	8%	40%
= Uncollectibles	$170	$80	$192	$6,640	$7,082

Bad debt expense under allowance method:

Allowance for doubtful debts ending balance Cr.	$7,082
Written off	$550
Allowance for doubtful debts beginning balance Dr.	$100
Bad debt expense	$7,732