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 2015 balance sheet disclosed the following: Current assets: Receivables, net of allowance for uncollectible accounts of $33,000 $447,000 During 2016, credit sales were $1,765,000, cash collections from customers $1,845,000, and $38,000 in accounts receivable were written off. In addition, $3,300 was collected from a customer whose account was written off in 2015. An aging of accounts receivable at December 31, 2016, 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 2016 write-offs and the collection of the receivable previously written off. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 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 4% 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 3. For situations (a)–(c) in requirement 2 above, what would be the net amount of accounts receivable reported in the 2016 balance sheet?

Answer 1

Solution 1:

Journal Entries - Raintree Cosmetic Company
S. No.	Particulars	Debit	Credit
1	Allowance for uncollectible accounts Dr	$38,000.00
	To Accounts receivables		$38,000.00
	(Being accounts receivables writeen off)
2	Cash A/c Dr	$3,300.00
	To Allowance for uncollectible accounts		$3,300.00
	(Being bad debts already written off recovered)

Solution 2 a & 3a:

Computation of Balance in Accounts receivable in 2016
Particulars	Amount
Opening accounts receivables (Gross) ($447,000+$33,000)	$480,000.00
Add: Credit Sales in 2016	$1,765,000.00
Less: Cash collected in 2016	$1,845,000.00
Less: Bad debts write off	$38,000.00
Closing balace in 2016 (Gross)	$362,000.00

Balance of allowance for uncollectible accounts before provison of 2016 = $33,000 - $38000 + $3,300 = $1,700 debit

Estimated bad debts expense = 4% of credit sales = $1,765,000*4% = $70,600

Therefore bad debts expense to be recoganzied = $1,700 + $70,600 = $72,300

Journal Entries - Raintree Cosmetic Company
S. No.	Particulars	Debit	Credit
1	Bad debts expense Dr	$72,300.00
	To Allowance for uncollectible accounts		$72,300.00
	(Being provision ofr uncollectible accounts made)

Net amount of accounts receivables to be reported in 2016 balance sheet = $362,000 - $70,600 = $291,400

Solution 2b & 3b:

Estimated bad debts expense = 10% of accounts receivables = $362,000*10% = $36,200

Therefore bad debts expense to be recoganzied = $1,700 + $36,200 = $37,900

Journal Entries - Raintree Cosmetic Company
S. No.	Particulars	Debit	Credit
1	Bad debts expense Dr	$37,900.00
	To Allowance for uncollectible accounts		$37,900.00
	(Being provision ofr uncollectible accounts made)

Net amount of accounts receivables to be reported in 2016 balance sheet = $362,000 - $36,200 = $325,800

Solution 2c & 3c:

Computation for allowance for uncollectible accounts
Ageing	% Receivables	Amount of Receivables	% Uncollectible	Allowance for uncollectible
0-60 days	70%	$253,400.00	5%	$12,670.00
61-90 days	20%	$72,400.00	15%	$10,860.00
91-120 days	5%	$18,100.00	20%	$3,620.00
Over 120 days	5%	$18,100.00	40%	$7,240.00
Total		$362,000.00		$34,390.00

Therefore bad debts expense to be recoganzied = $1,700 + $34,390 = $36,090

Journal Entries - Raintree Cosmetic Company
S. No.	Particulars	Debit	Credit
1	Bad debts expense Dr	$36,090.00
	To Allowance for uncollectible accounts		$36,090.00
	(Being provision ofr uncollectible accounts made)

Net amount of accounts receivables to be reported in 2016 balance sheet = $362,000 - $34,390 = $327,610