Question

At December 31, 2018, the trial balance of Hossam Company contained the following amounts before adjustments: Accounts Receivable $200,000 Allowance for Doubtful Accounts 1,500 Sales $400,000 Instructions: 1. Prepare the adjusting entry at December 31, 2018, to record bad debt expense if the company estimates that 6% of accounts receivable will be uncollectible. 2. Prepare the adjusting entry at December 31, 2018, to record bad debt expense if the company estimates that 3% of sales will be uncollectible. 3. Show the balance sheet presentation of accounts receivable at December 31, 2018 under assumption (1) above. 4. On January, 2019, a $1000 account receivable is written off as uncollectible. Prepare the journal entry to record the write-off. 5. On March 30, 2019, a $750 of the account that was written off on January, was collected. Prepare the journal entries to record that recovery. 6. Repeat part (4) above assuming that the company uses the direct write-off method instead of the allowance method in accounting for uncollectible

Answer 1

Answer 1 :

For the adjusting Entry at December 31,2018 to record bad debt expense i.e, 6% of accounts receivable we will calculate, 6% of $ 200,000 = $ 12000

Therefore Amount of adjusting wil be $12000 - $ 1500(Balance of Allowance for Doubtful Accounts as per trial balance) = $ 10500

Adjusting Entry:

Bad Debt Expense Dr $10500

Allowance for Doubtful Accounts Cr $10500

(Being Adjusting Entry to record bad debt expense estimated that 6% of accounts receivable will be uncollectible)

Answer 2 :

For the adjusting Entry at December 31,2018 to record bad debt expense i.e, 3% of sales we will calculate, 3% of $ 400,000 = $ 12000

Therefore Amount of adjusting wil be $12000 - $ 1500(Balance of Allowance for Doubtful Accounts as per trial balance) = $ 10500

Adjusting Entry:

Bad Debt Expense   Dr $10500

Allowance for Doubtful Accounts Cr $10500

(Being Adjusting Entry to record bad debt expense estimated that 3% of sales will be uncollectible)

Answer 3:

As per Assumption (1) at 31st December 2018 accounts receivable will be shown in balance sheet at Asset Side as below,

(i) Accounts Receivable $ 200000

(ii) Less : Allowance for Doubtful Accounts $ 12000

($ 1500 as per Trial Balance + $ 10500 as per Answer 1)

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Net Accounts Receivable (i-ii) $ 188000

Answer 4:

On January, 2019, a $1000 account receivable is written off as uncollectible. Prepare the journal entry to record the write-off.

Allowance for Doubtful Accounts Dr $ 1000

Accounts Receivable Cr $ 1000

(Being $ 1000 account receivable written off as uncollectible)

Answer 5:

On March 30, 2019, a $750 of the account that was written off on January, was collected. Prepare the journal entries to record that recovery.

(i) Reversal of Allowance up to the extent Collection Received

Accounts Receivable Dr $ 750

Allowance for Doubtful Accounts Cr $ 750

(ii) Receipt of Collection of the account that was written off

Cash/Bank Dr $ 750

Accounts Receivable Cr $ 750

Answer 6 :

If Company uses the direct write-off method instead of the allowance method in accounting for uncollectible they would not have "Allowance for Doubtful Accounts" hence at the time of default of collection "Bad debts Expense" will be debited.

Journal Entry :

Bad Debts Expense   Dr $ 1000

Accounts Receivable Cr $ 1000

(Being $ 1000 account receivable written off as uncollectible)