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 $34,000 $ 452,000 

During 2018, credit sales were $1,770,000, cash collections from customers $1,850,000, and $39,000 in accounts receivable were written off. In addition, $3,400 was collected from a customer whose account was written off in 2017. An aging of accounts receivable at December 31, 2018, reveals the following: 

Age Group	Percentage of Year-End Receivables in Group	Percent Uncollectible
0-60 days	60%	3%
61-90 days	10	5
91-120 days	20	25
Over 120 days	10	45

2. Prepare the year-end adjusting entry for bad debts according to each of the following situations: 

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

b. 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. 

c. 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

Solution 1:

Journal Entry 1 - Raintree Cosmetic Company
Event	Particulars	Debit	Credit
1	Allowance for doubtful accounts Dr	$39,000.00
	To Accounts receivables		$39,000.00
	(To written of accounts receivables)
2	Accounts receivables Dr	$3,400.00
	To Allowance for doubtful accounts		$3,400.00
	(To reinstate account previously written off)
3	Cash Dr	$3,400.00
	To Accounts receivables		$3,400.00
	(To record collection of accounts previously written off)

Solution 2:

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

= ($452,000 + $34,000) + $1,770,000 - $1,850,000 - $39,000

= $367,000

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

= $34,000 -  $39,000 + $3,400 = $1,600 debit

Computation of Allowance for Uncollectible Accounts
Ageing	% of year end receivables in Group	Accounts Receivables	% Uncollectible	Required Allowance
0-60 days	60%	$220,200	3%	$6,606
61-90 days	10%	$36,700	5%	$1,835
91-120 days	20%	$73,400	25%	$18,350
Over 120 days	10%	$36,700	45%	$16,515
Total		$367,000		$43,306

Journal Entry 2 - Raintree Cosmetic Company
Event	Particulars	Debit	Credit
a	Bad debts Expense Dr ($1,770,000*2%)	$35,400.00
	To Allowance for doubtful accounts		$35,400.00
	(To record bad debts expense)
b	Bad debts Expense Dr ($367,000*10% + $1,600)	$38,300.00
	To Allowance for doubtful accounts		$38,300.00
	(To record bad debts expense)
c	Bad debts Expense Dr ($43,306 + $1,600)	$44,906.00
	To Allowance for doubtful accounts		$44,906.00
	(To record bad debts expense)

Solution 3:

a. Net accounts receivables = $367,000 - ($35,400 - $1,600) = $333,200

b. Net accounts receivables = $367,000 - $36,700 = $330,300

c. Net accounts receivables = $367,000 - $43,306 = $323,694