In: Accounting
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 $46,000 | $ | 512,000 |
During 2018, credit sales were $1,830,000, cash collections from customers $1,910,000, and $55,000 in accounts receivable were written off. In addition, $4,600 was collected from a customer whose account was written off in 2017. An aging of accounts receivable at December 31, 2018, reveals the following:
Percentage of Year-End | Percent | |||
Age Group | Receivables in Group | Uncollectible | ||
0–60 days | 60 | % | 3 | % |
61–90 days | 10 | 5 | ||
91–120 days | 20 | 25 | ||
Over 120 days | 10 | 45 | ||
Required:
1. Prepare summary journal entries to account
for the 2018 write-offs and the collection of the receivable
previously written off.
2. Prepare the year-end adjusting entry for bad
debts according to each of the following situations:
Bad debt expense is estimated to be 2% of credit sales for the year.
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.
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?
Requirement 1
To record accounts receivable written off during the year 2018.
Allowance for uncollectible accounts.......................... 55,000
Accounts receivable................................................ 55,000
To record collection of account receivable previously written off.
Accounts receivable................................................... 4,600
Allowance for uncollectible accounts...................... 4,600
Cash.......................................................................... 4,600
Accounts receivable................................................ 4,600
Requirement 2
(a)
December 31, 2018
Bad debt expense (2% x $1,830,000).............................. 36,600
Allowance for uncollectible accounts...................... 36,600
(b)
December 31, 2018
Bad debt expense....................................................... 42,100
Allowance for uncollectible accounts (below)........... 42,100
Accounts receivable analysis:
Beginning balance $ 512,000
Add: Credit sales 1,830,000
Less: Write-offs (55,000)
Less: Cash collections (1,910,000)
Ending balance $ 377,000
$377,000 x 10% = $37,700 = Required allowance for uncollectible accounts
Allowance for uncollectible accounts analysis:
Beginning balance $46,000
Add: Collection of receivable previously written off 4,600
Less: Write-offs (55,000)
Balance before adjustment (4,400) debit balance
Required allowance (determined above) 37,700
Bad debt expense adjustment $42,100
(c)
December 31, 2018
Bad debt expense....................................................... 48,886
Allowance for uncollectible accounts (below)........... 48,886
Required allowance:
Age Group |
Amount |
Percent uncollectible |
Estimated allowance |
0-60 days |
$226,200 |
3% |
$ 6,786 |
61-90 days |
37,700 |
5% |
1,885 |
91-120 days |
75,400 |
25% |
18,850 |
Over 120 days |
37,700 |
45% |
16,965 |
Totals |
$377,000 |
$44,486 |
|
Allowance for uncollectible accounts analysis:
Beginning balance $46,000
Add: Collection of receivable previously written off 4,600
Less: Write-offs (55,000)
Balance before adjustment (4,400) debit balance
Required allowance 44,486
Bad debt expense adjustment $48,886
Requirement 3
Accounts receivable - Year-end allowance
(a) $377,000 - [$(4,400) + 36,600] = $344,800
(b) $377,000 - 37,700 = $339,300
(c) $377,000 - 44,486 = $332,514