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 $37,000	$	467,000

During 2018, credit sales were $1,785,000, cash collections from customers $1,865,000, and $42,000 in accounts receivable were written off. In addition, $3,700 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

1. Answer
Particular	Dr. Amount	Dr. Amount
Allowance for Doubtful Accounts a/c	$   37,000.00
Bad Debt Expenses   a/c	$      5,000.00
To    Accounts Receivables a/c		$   42,000.00
Cash/Bank                a/c	$      3,700.00
To     Bad Debt Recovered		$      3,700.00
Bad Debt Recovered   a/c	$      3,700.00
To Profit and Loss a/c		$      3,700.00
Profit and Loss a/c	$      5,000.00
To     Bad Debt Expenses		$      5,000.00

2. Answer
a.
Bad Debt Expenses    a/c	$    35,700.00
To Allowance for Doubtful Accounts a/c		$      35,700.00
b.
Bad Debt Expenses    a/c	$    34,500.00
To    Accounts Receivables a/c		$      34,500.00

c.
Total A/R	0-60 Days	61-90 Days	91-120 Days	Over 120 Days
	60%	10%	20%	10%
$                      3,45,000.00	$           2,07,000.00	$       34,500.00	$       69,000.00	$           34,500.00
Estimated Bad Debts	3%	5%	25%	45%
$                         40,710.00	$                 6,210.00	$          1,725.00	$       17,250.00	$           15,525.00

Bad Debt Expenses    a/c	$    40,710.00
To    Accounts Receivables a/c		$      41,710.00

3. Answer
Particular	Amount	Particular	Amount
To balance	$           4,67,000.00	By Bad Debt	$            5,000.00
To sales	$         17,85,000.00	By Allowance	$          37,000.00
		By Bank/Cash	$    18,65,000.00
		By Balance	$      3,45,000.00
Total	$         22,52,000.00	Total	$    22,52,000.00