Question

On December 31, 2019, Mills Manufacturing Ltd. had a $197,000 balance in its Accounts Receivable and a $10,400 balance in its Allowance for Doubtful Accounts. During 2020, the company made total sales of $858,000, of which $225,000 were cash sales. By the end of the year, Mills had received payments of $552,000 from its customers on account. The company also wrote off as uncollectible $13,300 of its receivables when it learned that these customers had declared bankruptcy. The company was subsequently able to recover $5,700 from one of these customers. (Note that this amount is not included in the cash collections noted above.) Management estimates that bad debts expense will be 3% of its credit sales.

1. Prepare the journal entries to record all the 2020 transactions, including the adjustment for bad debts expense at year end.

2. Show how the accounts receivable section of the statement of financial position at December 31, 2020, would be presented.

3. What amount of bad debts expense would appear in the statement of income for the year ended December 31, 2020?

Answer 1

Journal entries
S.no.	Accounts ttle and explanations		Debit $	Credit $
a.	Cash account			225000
	Accounts receivable			633000
	Sales revenue				858000
	(for sales made on account)
b.	Cash account			552000
	Accounts receivable			552000
	(for payment received)
c.	Allowance for doubtful accounts	13300
	Accounts receivable			13300
	(for amount written off)
d.	Accounts receivable			5700
	Allowance for doubtful accounts		5700
	(for amount reinstated)
e.	Cash account			5700
	Accounts receivable			5700
	(for cash received)
f.	Bad debts expenses (633000*3%)	18990
	Allowance for doubtful accounts		18990
	(for bad debts expenses)
Accounts receivable:
Beginning balance of AR		197000
Add: Credit sales			633000
Less: Cash received			-552000
Less: amount written off		-13300
Ending balance of accounts receivable	264700
Allowance for Doubtful accounts:
Beginning balance of Allowance		10400
Add: Bad debts expnses		18990
Less: Amount written off		-13300
Add: Amount reinstated		5700
Ending balance of Allowance		21790
Balance Sheet (Extract)
Accounts receivable-Gross		264700
Less: Allowance for doubtful accounts	21790
Accounts recievable-Net		242910
Income Statement
Bad debts expenses			18990