Question

Problem -4

Megan's Products is undecided about which base to use in estimating uncollectible accounts. On December 31, 2016, the balance in Accounts Receivable was $308,000 and net credit sales amounted to $2,700,000 during 2016. An aging analysis of the accounts receivable indicated that $31,000 in accounts are expected to be uncollectible. Past experience has shown that about 1% of net credit sales eventually are uncollectible.

Instructions

Prepare the adjusting entries to record estimated bad debt expense using the (1) percentage of sales basis and (2) the percentage of receivables basis under each of the following independent assumptions:

(a)   Allowance for Doubtful Accounts has a credit balance of $2,300 before adjustment.

(b)   Allowance for Doubtful Accounts has a debit balance of $370 before adjustment.

Answer 1

1	percentage of sales basis
	uncollectable amount = $2700,000*1% = $27000
a)	Allowance for Doubtful Accounts has a credit balance of $2,300 before adjustment.
	Additional amount credited will be = $27000 - $2300 = $24700
b)	Allowance for Doubtful Accounts has a debit balance of $370 before adjustment.
	Additional amount credited will be = $27000 + $370 = $27370
	Journal Entries	(In $)	(In $)
	Particulars	Debit	Credit
1 a)	Profit & Loss a/c	24700
	To Allowance for Doubtful Accounts		24700
1 b)	Profit & Loss a/c	27370
	To Allowance for Doubtful Accounts		27370
2	percentage of receivables basis
	uncollectable amount = $31000
a)	Allowance for Doubtful Accounts has a credit balance of $2,300 before adjustment.
	Additional amount credited will be = $31000 - $2300 = $28700
b)	Allowance for Doubtful Accounts has a debit balance of $370 before adjustment.
	Additional amount credited will be = $31000 + $370 = $31370
	Journal Entries	(In $)	(In $)
	Particulars	Debit	Credit
2 a)	Profit & Loss a/c	28700
	To Allowance for Doubtful Accounts		28700
2 b)	Profit & Loss a/c	31370
	To Allowance for Doubtful Accounts		31370