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 $39,000	$	477,000

During 2018, credit sales were $1,795,000, cash collections from customers $1,875,000, and $44,000 in accounts receivable were written off. In addition, $3,900 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	70	%	5	%
61–90 days	20		15
91–120 days	5		20
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:

Bad debt expense is estimated to be 4% 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. Prepair Journal Entries
Date	Account Title and Explanation	Debit	Credit
a	Allowance for Uncollectible Accounts	$44,000
	Accounts Receivable		$44,000
	(To write off accounts receivable)
b	Accounts Receivable	$3,900
	Allowance for Uncollectible Accounts		$3,900
	(To record allowance for uncollectible accounts)
c	Cash	$3,900
	Accounts Receivable		$3,900
	(To record collection of previously written off accounts receivable)
2. Year-end adjusting entry:
Entry	Date	Account Title and Explanation	Debit	Credit
a	31-Dec	Bad Debt Expense ($1,795000 x 4%) + $3900	$75,700
		Allowance for uncollectible accounts		$75,700
		(To record bad debt expense)
b	31-Dec	Bad Debt Expense	$36,400
		Allowance for uncollectible accounts		$36,400
		(To record bad debt expense)
c	31-Dec	Bad Debt Expense	$34,635
		Allowance for uncollectible accounts		$34,635
		(To record bad debt expense)
Accounts Receivable analysis for Entry B
Particulars	Amount
Beginning Balance	$477,000
Add: Credit Sales	$1,795,000
Less: Write off	($44,000)
Less: Cash collections	($1,875,000)
Ending balance	$353,000
Required allowance @ 10%	$35,300
Analysis of uncollectible accounts For Entry B
Particulars	Amount
Beginning Balance	$39,000
Add: Collections of receivable previously written off	$3,900
Less: Write offs	($44,000)
Balance before adjustment (Debit Balance)	($1,100)
Required allowance	$35,300
Bad debt expense adjustment	$36,400
Calculate the required allowance for Entry C
Age group	Amount	Percentage Uncollectible	Estimated allowance
0-60 days	$247,100	5%	$12,355
61 - 90 days	$70,600	15%	$10,590
91 - 120 days	$17,650	20%	$3,530
Over 120 days	$17,650	40%	$7,060
Total			$33,535
Analysis of uncollectible accounts For Entry C
Particulars	Amount
Beginning Balance	$39,000
Add: Collections of receivable previously written off	$3,900
Less: Write offs	($44,000)
Balance before adjustment (Debit Balance)	($1,100)
Required allowance	$33,535
Bad debt expense adjustment	$34,635
3. For situations (a)–(c) in requirement 2 above, what would be the net amount of accounts receivable reported in the 2016 balance sheet
Calculate the accounts receivable balance
Particulars	Accounts Receivable balance	Year end allowance	Net accounts receivable balance
(a)	$353,000	$75,700	$277,300
(b)	$353,000	$36,400	$316,600
( c)	$353,000	$34,635	$318,365