Question

Problem Set A
Copeland Company had the following account balances at December 31, 2016, before recording bad debt expense for the year:
	Unadjusted Trial Balance
	Accounts receivable			$1,400,000
	Allowance for uncollectible accounts (credit balance)			22,000
	Credit sales for 2016			1,950,000
	Ending 12/31/2015
	Balance in Accounts receivable on 1/1/2016			$1,200,000
	Balance in Allowance for uncollectible accounts (credit balance) on 1/1/2016			24,000
Copeland is considering the following approaches for estimating bad debts for 2016:
	Option A: Based on 3% of credit sales
	Option B: Based on an aging of year-end accounts receivable
	Days	Amount Outstanding	Estimated % Uncollectible
	0-30	$800,000	3%	$24,000
	31-60	300,000	6%	$18,000
	61-120	200,000	9%	$18,000
	Over 120	100,000	24%	$24,000
		$1,400,000		$84,000
REQUIRED:
1	Do the adjusting journal entry to record Bad debt expense and allowance for uncollectible accounts under Option A and Option B.
2	what are the gross accounts receivable and net account receivables under Option A and Option B.
3	What is the difference in accounts receivable turnover and the credit risk ratio under Option A v. Option B?
4	Which option may management prefer? Which option may shareholders or regulators prefer? Please discuss

Answer 1

1	Option A
	Credit sales	1950000
	Percentage of credit sales not collected	3%
	Bad debt expense	58500
	Journal entry
	Bad debt expense	58500
	Allowance for uncollectible accounts		58500
	Option B
	Aging method balance	84000
Less	Allowance for uncollectible balance 1/1/ 2016	24000
	Bad debt expense	60000
	Journal entry
	Bad debt expense	60000
	Allowance for uncollectible accounts		60000
2		Option A	Option B
	Gross accounts receivable	1400000	1400000
Less	Allowance for uncollectible at end	84000	82500
	Net accounts receivable	1316000	1317500
3	Accounts receivable turnover = net credit sales /Average accounts receivable
	Net sales	1950000	1950000
	Beginning accounts receivable	1176000	1176000
	Ending accounts receivable	1316000	1317500
	Average accounts receivable	1246000	1246750
	Accounts receivable turnover	1.57	1.56