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 2020 balance sheet disclosed the following: Current assets: Receivables, net of allowance for uncollectible accounts of $35,000 $ 457,000 During 2021, credit sales were $1,775,000, cash collections from customers $1,855,000, and $40,000 in accounts receivable were written off. In addition, $3,500 was collected from a customer whose account was written off in 2020. An aging of accounts receivable at December 31, 2021, reveals the following: Percentage of Year-End Percent Age Group Receivables in Group Uncollectible 0−60 days 65 % 4 % 61−90 days 15 10 91−120 days 15 30 Over 120 days 5 50 Required: 1. Prepare summary journal entries to account for the 2021 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 3% of credit sales for the year. Bad debt expense is estimated by adjusting the allowance for uncollectible accounts to the balance that reduces the carrying value of accounts receivable to the amount of cash expected to be collected. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable. Bad debt expense is estimated by adjusting the allowance for uncollectible accounts to the balance that reduces the carrying value of accounts receivable to the amount of cash expected to be collected. 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 2021 balance sheet?

Answer 1

Solution 1
Journal Entry 1 - Raintree Cosmetic Company
Event	Particulars	Debit	Credit
1	Allowance for doubtful accounts Dr	$40,000
	To Accounts receivables		$40,000
	(To record written of accounts receivables)
2	Accounts receivables Dr	$3,500
	To Allowance for doubtful accounts		$3,500
	(To reinstate account previously written off)
3	Cash Dr	$3,500
	To Accounts receivables		$3,500
	(To record collection of accounts previously written off)

Solution 2:
Beginning balance of accounts receivable, net	457000
Add: Beginning allowance account balance	35000
Add: Credit Sales	1775000
Less: Collection from customers	-1855000
Less: Accounts written off	-$40,000
Ending Balance of Accounts Receivable (Gross)	372000
Beginning balance of allowance account	35000
Less: Accounts written off	-$40,000
Add: Reinstatement of account	$3,500
Ending balance of allowance account	-1500

Journal Entry 2 - Raintree Cosmetic Company
Event	Particulars	Debit	Credit
a	Bad debts Expense Dr ($1,755,000*3%)	$53,250.00
	To Allowance for doubtful accounts		$53,250.00
	(To record bad debts expense)
b	Bad debts Expense Dr ($372,000*10% + $1500)	$38,700.00
	To Allowance for doubtful accounts		$38,700.00
	(To record bad debts expense)
c	Bad debts Expense Dr ($41292+ $1500) (Note 1)	$42,792.00
	To Allowance for doubtful accounts		$42,792.00
	(To record bad debts expense)

Note 1
Computation of Allowance for Uncollectible Accounts
Ageing	% of year end receivables in Group	Accounts Receivables	% Uncollectible	Required Allowance
0-60 days	65%	$2,41,800	4%	$9,672
61-90 days	15%	$55,800	10%	$5,580
91-120 days	15%	$55,800	30%	$16,740
Over 120 days	5%	$18,600	50%	$9,300
Total		$3,72,000		$41,292

SOLUTION 3:
	Accounts recivable	Ending Allowance Accounts Balance	Net realizable value
a. ($53250 - 1500)	$3,72,000	$51,750	$3,20,250
b. ($372000*10%)	$3,72,000	$37,200	$3,34,800
c.	$3,72,000	$41,292	$3,30,708