Question

1. Rain Forest Lumber 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 2018 balance sheet disclosed the following:

Current assets:
Receivables, net of allowance for uncollectible accounts of $42,000	$	492,000

During 2019, credit sales were $1,810,000, cash collections from customers $1,890,000, and $51,000 in accounts receivable were written off. In addition, $4,200 was collected from a customer whose account was written off in 2018. An aging of accounts receivable at December 31, 2019, 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	%

1. Prepare summary journal entries to account for the 2019 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 three situations: 2a. Bad debt expense is estimated to be 4% of credit sales for the year. 2b. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable. 2c. Bad debt expense is estimated by computing net realizable value of the receivables. 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 2019 balance sheet?

Answer 1

1.

	Account Titles	Debit	Credit
a	Allowance for Doubtful Accounts	$           51,000
	Accounts Receivable		$           51,000
b	Accounts Receivable	$             4,200
	Allowance for Doubtful Accounts		$             4,200
	Cash	$             4,200
	Accounts Receivable		$             4,200

2.
Accounts Receivable Balance = $534000+1810000-1890000-51000+4200-4200 = $403000
Allowance Balance, Unadjusted = $42000-51000+4200 = $4800 Debit

Age Group	Receivables	Percent Uncollectible	Allowance
0–60 days	$   282,100	5	$       14,105
61–90 days	$     80,600	15	$       12,090
91–120 days	$     20,150	20	$          4,030
Over 120 days	$     20,150	40	$          8,060
Total	$     403,000		$       38,285

a.

Account Titles	Debit	Credit
Bad Debt Expense	$           72,400
Allowance for Doubtful Accounts		$           72,400

Bad Debt Expense = $1810000 x 4% = $72400

b.

Account Titles	Debit	Credit
Bad Debt Expense	$           45,100
Allowance for Doubtful Accounts		$           45,100

Bad Debt Expense = $403000*10%+4800 = $45100

c.

Account Titles	Debit	Credit
Bad Debt Expense	$           43,085
Allowance for Doubtful Accounts		$           43,085

Bad Debt Expense = $38285 + 4800 = $43085

Net Realizable Value
(a) $403000-(72400-4800) = $335400

(b) $403000 - 40300 = $362700

(c) $403000 - 38285 = $364715