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 $36,000	$	462,000

During 2021, credit sales were $1,780,000, cash collections from customers $1,860,000, and $41,000 in accounts receivable were written off. In addition, $3,600 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	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 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 4% 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

Raintree Cosmetic
Workings for Answer 1
Calculation of opening Gross Receivables:	Amount $
Net Receivables	462,000.00
Add: Allowance for uncollectible accounts	36,000.00
Net Gross Receivables	498,000.00

Answer 1
Journal Entries
Account	Debit $	Credit $
Allowance for uncollectible accounts	41,000.00
Accounts Receivable		41,000.00
Accounts Receivable	3,600.00
Allowance for uncollectible accounts		3,600.00
Cash	3,600.00
Accounts Receivable		3,600.00

T Account- Accounts Receivable
Date	Account	Debit $	Date	Account	Credit $
	Opening Balance	498,000.00		Cash	1,860,000.00
	Sales	1,780,000.00		Allowance for uncollectible accounts	41,000.00
	Allowance for uncollectible accounts	3,600.00		Cash	3,600.00
				Closing Balance	377,000.00
		2,281,600.00			2,281,600.00

Unadjusted- Allowance for uncollectible accounts	Amount $
Allowance for uncollectible accounts- Opening	36,000.00
Add: Uncollectible recovered	3,600.00
Less: Accounts receivable written off	41,000.00
Unadjusted- Allowance for uncollectible accounts	(1,400.00)
Answer 2 a
Credit Sales	1,780,000.00
Allowance %	4%
Allowance amount	71,200.00
Add: Unadjusted- Allowance for uncollectible accounts	1,400.00
Bad debt expense at year end	72,600.00

Journal Entry
Account	Debit $	Credit $
Bad debt expense	72,600.00
Allowance for uncollectible accounts		72,600.00

Answer 2 b
Year end Accounts Receivable	377,000.00
Allowance %	10%
Allowance amount	37,700.00
Add: Unadjusted- Allowance for uncollectible accounts	1,400.00
Bad debt expense at year end	39,100.00

Journal Entry
Account	Debit $	Credit $
Bad debt expense	39,100.00
Allowance for uncollectible accounts		39,100.00

Answer 2 c
Age Group	Year end Receivables	% of Year end Receivables	Receivables	% Uncollectible	Allowance amount
0-60 days	377,000.00	70%	263,900.00	5%	13,195.00
61-90 days	377,000.00	20%	75,400.00	15%	11,310.00
91-120 days	377,000.00	5%	18,850.00	20%	3,770.00
Over 120 days	377,000.00	5%	18,850.00	40%	7,540.00
Total			377,000.00		35,815.00

Bad debt expense at year end:
Allowance amount	35,815.00
Add: Unadjusted- Allowance for uncollectible accounts	1,400.00
Bad debt expense at year end	37,215.00

Journal Entry
Account	Debit $	Credit $
Bad debt expense	37,215.00
Allowance for uncollectible accounts		37,215.00

Answer 3	Situation a	Situation b	Situation c
Accounts receivable (Gross)	377,000.00	377,000.00	377,000.00
Less: Allowance for uncollectible accounts	71,200.00	37,700.00	35,815.00
Accounts receivable (Net)	305,800.00	339,300.00	341,185.00

The above is the net amount of accounts receivable reported in the 2021 balance sheet.