Question

QUESTION 1- Part 1

Rainbow Inc uses the allowance method when accounting for bad debt and employs a combination approach to derive their estimate. Throughout the year, they book an accrual totaling 1/2 of 1% of credit sales. At the end of the year, Rainbow updates the accounts to reflect information obtained from a detailed analysis of an accounts receivable aging schedule.

Rainbow’s controller provides you with the following information to assist you with your work:

• At 12/31/2018 the company reported $357,225 of Accounts Receivable on their balance sheet (net of an Allowance for Doubtful Accounts at 12/31/2018 of $40,525).  
• Between January 1 and December 31, 2019 Rainbow recorded $35,000 of total actual customer write-offs.
• 2019 credit sales totaled $5,000,000 and 2019 collections from customers as payment on account totaled $4,937,750

At 12/31/2019, Rainbow prepared the following aging analysis (note that the >90 day category has been intentionally omitted):

	A/R in Category	% Uncollectible
Not overdue	$182,500	5%
1-30 days	137,000	8%
31-60 days	68,500	12%
61-90 days	28,000	40%
over 90 days	?	70%
Total	?

You must show all your work to receive credit.

Question 1 – Part 1 Requirements:

1. Using summary entries, recreate all entries recorded by Rainbow during 2019 for Accounts Receivable and Bad Debt. (Be sure to include the aging schedule that you used to support the value of your December entry).

2. Using good form, provide a clearly labeled T account showing the 2019 activity within Accounts Receivable and the Allowance for Doubtful Accounts.

3. Using good form, show how Rainbow’s receivables will be reported on the company’s 12/31/2019 balance sheet and provide the value for the bad debt expense Rainbow will report on the company’s 2019 income statement.

QUESTION 1 - Part 2 (Extra Credit) Continue with all of the Rainbow facts provided in Part 1 except assume that the employee responsible for recording the $35,000 of write-offs incorrectly used the direct write off method when constructing the entry. Rainbow discovered this error in December just prior to making their entry from the aging analysis.

Question 1 – Part 2 Requirements (Extra Credit):

4. Show the entry that Rainbow made for the write offs (i.e. the erroneous entry).
5. Prepare Rainbow’s December entries for bad debt making sure to correct for this mistake.

Answer 1

Calculation of closing balance of accounts receivable

Accounts receivable Opening (Net)	$          3,57,225
Allowance for Doubtful account	$             40,525
Accounts receivable Opening (Gross)	$          3,97,750
Credit sales in 2019	$       50,00,000
Amount collected in 2019	$      -49,37,750
Amount written off in 2019	$            -35,000
Accounts receivable Closing (Gross)	$          4,25,000

Calculation of the amount of Allowance for Doubtful debt to be recorded in the balance sheet

Category	A/R in category	% Uncollectible	Uncollectible allowance
Not overdue	$          1,82,500	5%	$              9,125
1-30 days	$          1,37,000	8%	$            10,960
31-60 days	$             68,500	12%	$              8,220
61-90 days	$             28,000	40%	$            11,200
Over 90 days	$                9,000	70%	$              6,300
Total	$          4,25,000		$            45,805

Part I

Required a

Particulars	Debit	Credit
Accounts Receivable	$       50,00,000
Sales		$          50,00,000
(to record credit sales)
Cash	$       49,37,750
Accounts Receivable		$          49,37,750
(to record collection from parties)
Allowance for doubtful account	$             35,000
Accounts Receivable		$                35,000
(to record amount written off)
Bad Debt Expense	$             40,280
Allowance for doubtful account		$                40,280
(to record provision for doubtful debt)

Required b

Required c

Required d

Particulars	Debit	Credit
Bad debt Expense	$             35,000
Accounts Receivable		$             35,000

Required e

Particulars	Debit	Credit
Allowance for doubtful account	$             35,000
Bad debt Expense		$             35,000
(to rectify the wrong entry )
Bad Debt Account	$             40,280
Allowance for doubtful account		$             40,280
(to record provision for doubtful debt)

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