Question

The Manda Panda Company uses the allowance method to account for bad debts. At the beginning of 2018, the allowance account had a credit balance of $75,000. Credit sales for 2018 totaled $2,400,000 and the year-end accounts receivable balance was $490,000. During this year, $73,000 in receivables were determined to be uncollectible. Manda Panda anticipates that 3% of all credit sales will ultimately become uncollectible. The fiscal year ends on December 31.

Required:
1. Does this situation describe a loss contingency?
2. What is the bad debt expense that Manda Panda should report in its 2018 income statement?
3. Prepare the appropriate journal entry to record the contingency.
4. Complete the table below to calculate the net realizable value Manda Panda should report in its 2018 balance sheet.

Answer 1

This is a loss contingency. Some loss contingencies don’t involve

liabilities at all. Some contingencies when resolved cause a

noncash asset to be impaired, so accruing it means reducing the

related asset rather than recording a liability. The most common

loss contingency of this type is an uncollectible receivable, as

described in this situation.

2.

Requirement 2

Bad debt expense: 3% x $2,400,000 = $72,000

3.

Requirement 3

Bad debt expense (3% x $2,400,000)

72,000

Allowance for uncollectible accounts

72,000

Comment

4.

Requirement 4

Allowance for uncollectible accounts:

Beginning of 2009

$75,000

Write off of bad debts*

73,000

Credit balance before accrual

2,000

Year-end accrual (Req. 3)

72,000

End of 2009

$74,000

Allowance for uncollectible accounts

73,000

Accounts receivable 73,000

Net realizable value:

Accounts receivable

$490,000

Less: Allowance for uncollectible accounts

(74,000)

Net realizable value

$416,000