In: Accounting
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:
3. For situations (a)–(c) in requirement 2 above,
what would be the net amount of accounts receivable reported in the
2018 balance sheet?
Solution 1 | |||||
Journal Entry 1 - Raintree Cosmetic Company | |||||
Event | Particulars | Debit | Credit | ||
1 | Allowance for doubtful accounts Dr | $35,000 | |||
To Accounts receivables | $35,000 | ||||
(To record written of accounts receivables) | |||||
2 | Accounts receivables Dr | $3,000 | |||
To Allowance for doubtful accounts | $3,000 | ||||
(To reinstate account previously written off) | |||||
3 | Cash Dr | $3,000 | |||
To Accounts receivables | $3,000 | ||||
(To record collection of accounts previously written off) | |||||
SOLUTION 2: | |||||
ending balance of Gross accounts receivable = =432000+30000+1750000-1830000-35000 = $347,000 | |||||
Ending unadjusted balance of allowance for doubtful account = =30000-35000+3000 = $2000 Debit balance | |||||
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% + $2000) | $36,700.00 | |||
To Allowance for doubtful accounts | $36,700.00 | ||||
(To record bad debts expense) | |||||
c | Bad debts Expense Dr ($35047+ $2000) (Note 1) | $37,047.00 | |||
To Allowance for doubtful accounts | $37,047.00 | ||||
(To record bad debts expense) | |||||
Note 1 | |||||
Computation of Allowance for Uncollectible Accounts | |||||
Ageing | % of year end receivables in Group | Accounts Receivables | % Uncollectible | Required Allowance | |
0-60 days | 65% | $2,25,550.00 | 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 | $3,47,000.00 | $35,047.00 | |||
SOLUTION 3: | |||||
Accounts recivable | Ending Allowance Accounts Balance | Net realizable value | |||
a. ($52500 -$2000) | $3,47,000 | $50,500 | $2,96,500 | ||
b. ($347000*10%) | $3,47,000 | $34,700 | $3,12,300 | ||
c. | $3,47,000 | $35,047 | $3,11,953 |