Question

1.) On December 31, 20x7, Corp. A (created on January 1, 20x7), which uses the allowance method to record bad debts expense, estimates that is will eventually incur $5,400 of bad debt expense on its December 31, 20x7 accounts receivable total of $226,000. Record the end-of-year journal entry to record bad debt expense for the year.

2.) On May 11, 20x8, Corp. A learns that customer, Frank Smith, has died. Prepare a journal entry to write of Frank’s $415 account receivable.

3.) On December 31, 20x8, Corp. A prepares an ageing analysis of its end-of-year Accounts Receivable account balance which has now increased to $461,000. Corp. A determines that $9,400 of the $461,000 accounts receivable total will likely never be collected. Assume that Corp. A’s December 31, Allowance for Bad Debts account balance is a credit of $300. Prepare a journal entry to record bad debt expense for year 20x8 and to adjust the Allowance for Bad Debts account to the proper balance.

Answer 1

Explanations:

1. In allowance method, the expected bad debts are recognised as bad debts and the amount is transferred to "Allowance for Doubtful Accounts". Therefore, Bad Debt Expense Account is debited and Allowance for doubtful accounts is credited to record the expense and create allowance with the expected amount of default.
2. Any account receivabe is written off to the allowance for doubtful accounts in allowance method. Therefore, Allowance for Doubtful Accounts is credited and Accounts Receivable is credited to write off the amount from books.
3. There is already an outstanding credit balance of $300 in Allowance for Doubtful Accounts. A total of $9,400 is required to created as allowance of doubtful accounts. Therefore, the balance amount of $9,100 ($9,400 - $300) should be recorded as bad debts and transferred to the Allowance for Doubtful Accounts.