Question

Castle Company provides estimates for its uncollectible accounts. The allowance for uncollectible accounts had a credit balance of $17,780 at the beginning of 2021 and a $23,410 credit balance at the end of 2021 (after adjusting entries). If the direct write-off method had been used to account for uncollectible accounts (bad debt expense equals actual write-offs), the income statement for 2021 would have included bad debt expense of $18,100 and revenue of $3,200 from the collection of previously written off bad debts.

Required:

Determine bad debt expense for 2021 according to the allowance method.

Answer 1

Ans:

1. Income statement would have included bad debt expenses of $18100 and $3200 from the collection of previously written off debtors. Therefore, amount written off without recovery is

$18100 - $3200 = $14900

2. Increase in balance of allowance for doubtful debts:

Uncollectible accounts credit balance in the ending	$23410
Less: Uncollectible accounts credit balance in the beginning	($17780)
Increase in credit balance of allowance for doubtful debts	$5630

3. Bad Debt Expense using allowance method:

Amount written off without recovery	$14900
Increase in credit balance of allowance for doubtful debts	$5630
Bad Debt Expense using allowance method	$20530

Cross Verification through Journal entries using Allowance Method:

Sr. No	Account Name	Debit ($)	Credit ($)
1	Allowance for doubtful accounts	$18100
	Accounts Receivable		$18100
	(Being bad debt expense written off)
2	Accounts Receivable	$3200
	Allowance for doubtful accounts		$3200
	(Being amount recovered from previously doubtful debts)
3	Cash	$3200
	Accounts Receivable		$3200
	(Being amount received from recovery of bad debts)
4	Bad Debt Expense	$20530
	Allowance for Doubtful Accounts		$20530
	(Being bad debt expense adjusted as per allowance method)

Reconciliation:

Beginning Credit balance	$17780
Less: Write off to income statement	($18100)
Add: Recovery	$3200
Add: Bad debt expenses as calculated	$20530
Ending credit balance	$23410