Question

please provide an example:

5. Bad Debts; a. Estimating allowance for bad debts under both the percentage of sales and the percentage of assets method (aging of receivables)

b. Determining the ending balance in both Accounts Receivable and Allowance for Doubtful Accounts when given beginning balance in the two accounts and activity for the year.

c. Same as (b) but for Bad Debt Expense

Answer 1

Answer. (a) Estimating bad debts.

Accountants use two basic methods to estimate uncollectible accounts for a period.The first method percentage of sales methods focuses on the income statement and the relationship of uncollectible accounts to sales.The second method of percentage of receiveables method focuses on the balance sheet and the relationship of the allowance for uncollectible accounts to accounts receiveable.

Percentage of sales method.

The percentage of sales method estimates uncollectible accounts from the credit sales of a given period.When cash sales are samll or make up a fairly constant percentage of total sales,firms base the circulation of total net sales.Since atleast one of these conditions is usually met,companies commonly use total net sales rather than credit sales.The formula to determine the amount of the ending estimated bad debt entry is :

Bad Debt Expense = Net Sales (total or credit) x Percentage Estimated as Uncollectible.

Example .Assume that Rankin Company's estimates uncollectible accounts at 1% of total net sales.Total net sales for the year is $500,000 ; receivables at year end were $100,000; and the allowance for doubtfull; and the Allowance for Doubtful Accounts had a zero balance.Rankin would make the following the following adjusting entry at year end:

Dec 31	Debit	Credit
Bad Debt Expense	5000
Allowance for Doubtful Accounts To record estimated uncollectible accounts (500,000 x 1%).		5000

Rankin reports Bad Debt Expense on the income statement.It reports the accounts receivable less the allowance among  current assets in the balance sheet as follows;

Accounts Receivable $100,000 Less: Accounts for doubtful accounts (5000)    Accounts receivable,Net $95000 Or the balance sheet could show: Accounts receivable ( less estimated uncollectible accounts,5000) $95000

On the income statement,Rankin would match the bad debt expense against sales revenues in the period.we would classify this expense as a selling expense since it is a normal consequence of selling on credit.

The allowance for doubtful accounts can have either a debit or credit balance before the year end adjustment.Under the pecentage of sales method,the company ignores any existing balance in the allowance when calculating the amount of the year end adjustment (except that the allowance account must have a credit balance after adjustment).

The percentage of receivable method-

The percenage of recievable method estimates uncolectible accounts by determining the desired size of the Allowance for Uncollectible Acoounts. Rankin Would multiply the ending balance in accounts recievable by a rate based on its uncollectible acoounts experience. In the percentage of recievable method, the company may use either an overall rate or a different rate for each age categoryof recievables.

To Calculate the adjusting entry amount of the entry for bad debt expense under the percentag of recievables method using an overall rate , Rankin would use:

Bad Debt Exense =( Accounts recevable endng balance* Percentage estimated as uncollectible) - Existing credit balance in allowance for doubtful accounts or + existing debit balance in allowance for doubtful accounts.

Using the same information as before , Rankin makes an estimate of uncollectible accounts at the end of the year.The balance of accounts recievable $100,000 and the allowance account has no balance If Rankin estimates that 6% of the recievable will be uncollectible the adjusting entry would be:

Debit Credit

Dec 31 Bad Debt expense 6,000

Allowance for doubtful accounts 6000 ($100,000 x 6%) - 0   

Accounts Receivable would be reported on the balance sheet as (notice how the allowance for doubtful accounts equals 6% of accounts receivable):

Accounts receivable $100,000

Less- Allowance for doubtful accounts (6000)

Accounts Receivable,Net $94000

or the balance sheet could show :

Accounts receivable (less estimated uncollectible accounts,$6000) $94000