Question

Nipomo Widget reviewed the following information from its accounting records for theyear ended December 31, 2011, before adjustment:

Sales during 2011 $800,000

Credit Sales are 80% of sales

Collections from customers in 2011 590,000

Accounts Receivable 165,000

Allowance for Uncollectible Accounts

(before adjustment)

2,050 credit

Nipomo Widget uses the percent-of-sales method, at 1.5%, to estimate uncollectible accounts for 2011.

The president of the company wants to change to the aged accounts receivable method and estimates $7,500 as the uncollectible amount for 2011.

For each method of determining the estimate amount, you are to provide:

1. the adjusting Journal entry.

2. the ending balance in the Allowance account.

3. the net realizable value of accounts receivable.

Answer 1

Method-1 Percent of sales method:
1
Bad debt expense: $ 800,000 *80% *1.5% = 9600
Adjusting entry:
Bad debt expense Account Dr.				9600
Allowance for uncollectible Accounts					9600
2. Ending balance in Allowance:
Existing balance in Allowance			2050
Add: bad debt expense			9600
Ending balance in Allowance			11650
3. Net realizable Accounts receivable:
Accounts receivable-Gross			165000
Less: Allowance			11650
Net realizable value of Accounts Rec.			153350
Method-2
1. Bad debt expense:
Estimated balance in Allowance required				7500
Less: existing balance in Allowance				2050
bad debt expense				5450
Adjusting entry:
Bad debt expense Account Dr.				5450
Allowance for uncollectible Accounts					5450
2. Ending balance in Allowance:
Existing balance in Allowance				2050
Add: bad debt expense				5450
Ending balance in Allowance				7500
3. Net realizable Accounts receivable:
Accounts receivable-Gross				165000
Less: Allowance				7500
Net realizable value of Accounts Rec.				157500