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 $43,000	$	497,000

During 2021, credit sales were $1,815,000, cash collections from customers $1,895,000, and $52,000 in accounts receivable were written off. In addition, $4,300 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.

• 1

  Record accounts receivable written off during the year 2021.

• 2

  Record entry to reinstate an account receivable previously written off.

• 3

  Record collection of an account 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.

• 1

  Bad debt expense is estimated to be 2% of credit sales for the year.

• 2

  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.

• 3

  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 2021 balance sheet?

Net account receivable reported

A.

B.

C.

Answer 1

Solution 1:

Journal Entry 1 - Raintree Cosmetic Company
Event	Particulars	Debit	Credit
1	Allowance for doubtful accounts Dr	$52,000.00
	To Accounts receivables		$52,000.00
	(To written of accounts receivables)
2	Accounts receivables Dr	$4,300.00
	To Allowance for doubtful accounts		$4,300.00
	(To reinstate account previously written off)
3	Cash Dr	$4,300.00
	To Accounts receivables		$4,300.00
	(To record collection of accounts previously written off)

Solution 2:

Ending balance in accounts receivables = Beginning receivables + Credit sales - Collection - Write off

= ($497,000 + $43,000) + $1,815,000 - $1,895,000 - $52,000

= $408,000

Ending balance in allowance for doubtful accounts before adjusting entry = Beginning balance - Write off + Bad debts recovered previously written off

= $43,000 -  $52,000 + $4,300 = $4,700 debit

Computation of Allowance for Uncollectible Accounts
Ageing	% of year end receivables in Group	Accounts Receivables	% Uncollectible	Required Allowance
0-60 days	60%	$244,800	3%	$7,344
61-90 days	10%	$40,800	5%	$2,040
91-120 days	20%	$81,600	25%	$20,400
Over 120 days	10%	$40,800	45%	$18,360
Total		$408,000		$48,144

Journal Entry 2 - Raintree Cosmetic Company
Event	Particulars	Debit	Credit
a	Bad debts Expense Dr ($1,815,000*2%)	$36,300.00
	To Allowance for doubtful accounts		$36,300.00
	(To record bad debts expense)
b	Bad debts Expense Dr ($408,000*10% + $4,700)	$45,500.00
	To Allowance for doubtful accounts		$45,500.00
	(To record bad debts expense)
c	Bad debts Expense Dr ($48,144 + $4,700)	$52,844.00
	To Allowance for doubtful accounts		$52,844.00
	(To record bad debts expense)

Solution 3:

a. Net accounts receivables = $408,000 - ($36,300 - $4,700) = $376,400

b. Net accounts receivables = $408,000 - $45,500 = $362,500

c. Net accounts receivables = $408,000 - $52,844 = $355,156