Question

At December 31, 2020, the trial balance of Darby Antiques contained the following amounts before adjustment.

Journalize entries to record transactions related to bad debts.

	Debit	Credit
Accounts Receivable	£385,000
Allowance for Doubtful Accounts		£1,000
Sales Revenue		970,000

Instructions

a. Based on the information given, which method of accounting for bad debts is Darby using—the direct write‐off method or the allowance method? How can you tell?

b. Prepare the adjusting entry at December 31, 2020, for bad debt expense, assuming an aging schedule indicates that £11,750 of accounts receivable will be uncollectible.

£10,750

c. Repeat part (.b.) assuming that instead of a credit balance there is a £1,000 debit balance in Allowance for Doubtful Accounts.

d. During the next month, January 2021, a £3,000 account receivable is written off as uncollectible. Prepare the journal entry to record the write‐off.

e. Repeat part (.d.) assuming that Darby uses the direct write‐off method instead of the allowance method in accounting for uncollectible accounts receivable.

f. What type of account is Allowance for Doubtful Accounts? How does it affect how accounts receivable is reported on the statement of financial position at the end of the accounting period?

please note the following additional information

• Incorporate GST, using the GST Clearing account, as needed. Accounts receivable of £385,000 is GST inclusive, but the Allowance for Doubtful Accounts and Sales Revenue accounts are net of GST.
• For part b., the figure £11,750 is net of GST.
• For part d., the figure £3,000 does not include GST, i.e., the GST inclusive amount is £3,450. The GST portion is reimbursable from the government.
• Replace Instruction e. with the following: In February, £2,300 of accounts receivable, previously written off, was collected. The £2,300 includes GST. Prepare the required journal entries.
• Replace Instruction f. with the following: Assume the balance for Accounts Receivable on 1 January 2020 was £420,000, including GST, and the balance in the Allowance account was £2,000, not including GST. The Sales Revenue shown (£970,000) is for the year. Calculate the days in accounts receivable for 2020 and analyse the trend from 2019, when days in accounts receivable were 140. Suppose Darby’s credit terms allow customers to pay in equal instalments over a six month period. How would this affect your conclusion as to collection efficiency?   

Answer 1

a)	Allowance method
b)
1)	Account titles			Debit	Credit
	Bad debts expense			10750
	allowance for doubtful accounts		10750
2)	Bad debts expense			9700
	allowance for doubtful accounts		9700
c)
1)	Account titles			Debit	Credit
	Bad debts expense			12750
	allowance for doubtful accounts		12750
2)	Bad debts expense			9700
	allowance for doubtful accounts		9700
d)	Account titles			Debit	Credit
	Allowance for doubtful accounts	3,000
	Account receivable				3,000
e)	Account titles			Debit	Credit
	Bad debts expense			3,000
	Account receivable				3,000
f)	Allowance for Doubtful accounts is a contra asset account
	it nets against the total receivables to be presented on the
	Balance sheet ,thus it reflects the amount which is expected to be paid
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