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 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?

Answer 1

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