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 $45,000	$	507,000

During 2021, credit sales were $1,825,000, cash collections from customers $1,905,000, and $54,000 in accounts receivable were written off. In addition, $4,500 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	70	%	5	%
61−90 days	20		15
91−120 days	5		20
Over 120 days	5		40

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:

1. Bad debt expense is estimated to be 4% of credit sales for the year.
2. 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.
3. 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

Answer 1

1.

Account Titles	Debit	Credit
Allowance for Uncollectible Accounts	$           54,000
Accounts Receivable		$            54,000

Account Titles	Debit	Credit
Accounts Receivable	$              4,500
Allowance for Uncollectible Accounts		$              4,500
Cash	$              4,500
Accounts Receivable		$              4,500

2.
Accounts Receivable Balance = $552000 + 1825000 - 1905000 - 54000 + 4500 - 4500 = $418000
Allowance for Uncollectible Accounts Balance = $45000 - 54000 + 4500 = $4500 Debit

a.

Account Titles	Debit	Credit
Bad Debt Expense	$           73,000
Allowance for Uncollectible Accounts		$            73,000

Bad Debt Expense =1825000*4% = $73000

b.

Account Titles	Debit	Credit
Bad Debt Expense	$           46,300
Allowance for Uncollectible Accounts		$            46,300

Bad Debt Expense = 418000*10%+4500 = $46300

c.

Account Titles	Debit	Credit
Bad Debt Expense	$           44,210
Allowance for Uncollectible Accounts		$            44,210

Bad Debt Expense = $39710+4500 = $44210

Age Group	Amount	Percent Uncollectible	Allowance
0-60 days	$      292,600	5%	$      14,630
61-90 days	$         83,600	15%	$      12,540
91-120 days	$         20,900	20%	$        4,180
Over 120 days	$         20,900	40%	$        8,360
	$      418,000		$      39,710

3.
a.

Accounts Receivable, Gross	$      418,000
Less: Allowance for Doubtful Accounts	$        68,500
Accounts Receivable, Net	$      349,500

b.

Accounts Receivable, Gross	$      418,000
Less: Allowance for Doubtful Accounts	$        41,800
Accounts Receivable, Net	$      376,200

c.

Accounts Receivable, Gross	$      418,000
Less: Allowance for Doubtful Accounts	$        39,710
Accounts Receivable, Net	$      378,290