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 2020 balance sheet disclosed the following:

Current assets:
Receivables, net of allowance for uncollectible accounts of $34,000	$	452,000

During 2021, credit sales were $1,770,000, cash collections from customers $1,850,000, and $39,000 in accounts receivable were written off. In addition, $3,400 was collected from a customer whose account was written off in 2020. An aging of accounts receivable at December 31, 2021, 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 2021 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:

1. Bad debt expense is estimated to be 2% of credit sales for the year.
2. Bad debt expense is estimated by adjusting the allowance for uncollectible accounts to the balance that reduces the carrying value of accounts receivable to the amount of cash expected to be collected. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable.
3. Bad debt expense is estimated by adjusting the allowance for uncollectible accounts to the balance that reduces the carrying value of accounts receivable to the amount of cash expected to be collected. 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 2021 balance sheet?

Answer 1

Solution 1
Journal Entry 1 - Raintree Cosmetic Company
Event	Particulars	Debit	Credit
1	Allowance for doubtful accounts Dr	$39,000
	To Accounts receivables		$39,000
	(To record written of accounts receivables)
2	Accounts receivables Dr	$3,400
	To Allowance for doubtful accounts		$3,400
	(To reinstate account previously written off)
3	Cash Dr	$3,400
	To Accounts receivables		$3,400
	(To record collection of accounts previously written off)
SOLUTION 2:
ending balance of Gross accounts receivable = =452000+34000+1770000-1850000-39000 = $367,000
Ending unadjusted balance of allowance for doubtful account = =34000-39000+3400 = $1600 Debit balance
Journal Entry 2 - Raintree Cosmetic Company
Event	Particulars	Debit	Credit
a	Bad debts Expense Dr ($1,770,000*2%)	$35,400.00
	To Allowance for doubtful accounts		$35,400.00
	(To record bad debts expense)
b	Bad debts Expense Dr ($367,000*10% + $1600)	$38,300.00
	To Allowance for doubtful accounts		$38,300.00
	(To record bad debts expense)
c	Bad debts Expense Dr ($43306+ $1600) (Note 1)	$44,906.00
	To Allowance for doubtful accounts		$44,906.00
	(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	60%	$2,20,200.00	3%	$6,606.00
	61-90 days	10%	$36,700.00	5%	$1,835.00
	91-120 days	20%	$73,400.00	25%	$18,350.00
	Over 120 days	10%	$36,700.00	45%	$16,515.00
	Total		$3,67,000.00		$43,306.00
	SOLUTION 3:
		Accounts recivable	Ending Allowance Accounts Balance	Net realizable value
	a. ($35400 -$1600)	$3,67,000	$33,800	$3,33,200
	b. ($367000*10%)	$3,67,000	$36,700	$3,30,300
	c.	$3,67,000	$43,306	$3,23,694