Question

Raintree Cosmetic 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 2017 balance sheet disclosed the following: Current assets: Receivables, net of allowance for uncollectible accounts of $37,000 $ 467,000 During 2018, credit sales were $1,785,000, cash collections from customers $1,865,000, and $42,000 in accounts receivable were written off. In addition, $3,700 was collected from a customer whose account was written off in 2017. An aging of accounts receivable at December 31, 2018, reveals the following: Percentage of Year-End Percent Age Group Receivables in Group Uncollectible 0–60 days 60 % 3 % 61–90 days 10 5 91–120 days 20 25 Over 120 days 10 45

Required: 1. Prepare summary journal entries to account for the 2018 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 situations: Bad debt expense is estimated to be 2% of credit sales for the year. 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. 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 2018 balance sheet?

For situations (a)–(c) in requirement 2 above, what would be the net amount of accounts receivable reported in the 2018 balance sheet?

	Net account receivable reported a. b. c.

Answer 1

1. Prepare summary journal entries to account for the 2018 write-offs and the collection of the receivable previously written off :

Beginning Balances:

Accounts Receivable

$ 467,000 + $ 37,000 = $ 504,000 gross amount

Allowance for Doubtful Accounts

$ 37,000

During 2018, credit sales were $1,785,000,

Dr Accounts Receivable $ 1,785,000

Cr Sales $ 1,785,000

cash collections from customers $1,865,000,

Dr Cash $ 1,865,000

Cr Accounts Receivable $ 1,865,000

and $42,000 in accounts receivable were written off.

Dr Allowance for Doubtful Accounts $ 42,000

Cr Accounts Receivable $ 42,000

In addition, $3,700 was collected from a customer whose account was written off in 2017.

Dr Accounts Receivable $ 3,700

Cr Allowance for Doubtful Accounts $ 3,700

Dr Cash $ 3,700

Cr Accounts Receivable $ 3,700

Ending Balance:

Accounts Receivable

$ 504,000 + $ 1,785,000 - $ 1,865,000 - $ 42,000 + $ 3,700 - $ 3,700 = $ 382,000

Allowance for Doubtful Accounts

$ 37,000 - $ 42,000 + $ 3,700 = - $ 1,300

Since the Allowance account carries a normal Credit balance, a negative amount means that it now has a Debit balance.

2. Prepare the year-end adjusting entry for bad debts according to each of the following situations:

a) Bad debt expense is estimated to be 2% of credit sales for the year:

When using percentage of sales, the current balance in the Allowance account is ignored.

$ 1,785,000 x 2% = $ 35,700 adjustment

Dr Bad Debt Expense $ 35,700

Cr Allowance for Doubtful Accounts $ 35,700

The balance in the Allowance account is now $ 35,700 - $ 1,300 = $ 34,400 credit

b) 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:

When using accounts receivable as a basis for estimating bad debt, the current balance in the Allowance account is not ignored.

$ 382,000 x 10% = $ 38,200 amount estimated to be uncollectible

$ 38,200 + $ 1,300 Debit Balance = $ 39,500 adjustment

Dr Bad Debt Expense $ 39,500

Cr Allowance for Doubtful Accounts $ 39,500

The Allowance account now has a Credit balance of $ 38,200, the same amount that is estimated to be uncollectible.

c) 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:

0-60 days (60% x $ 382,000 x 3%) = $ 6,876

61-90 days (10% x $ 382,000 x 5%) = $ 1,910

91-120 days (20% x $ 382,000 x 25%) = $ 19,100

Over 120 days (10% x $ 382,000 x 45%) = $ 17,190

Total estimated to be uncollectible = $ 45,076

$ 45,076 + $ 1,300 Debit balance = $ 46,376 adjustment

Dr Bad Debt Expense $ 46,376

Cr Allowance for Doubtful Accounts $ 46,376

The Allowance account now has a Credit balance of $ 45,076, the same amount that is estimated to be uncollectible.

3. For situations (a)–(c) in requirement 2 above, what would be the net amount of accounts receivable reported in the 2018 balance sheet:

Net account receivable reported

(a) $ 382,000 - $ 34,400 = $ 347,600

(b) $ 382,000 - $ 38,200 = $ 343,800

(c) $ 382,000 - $ 45,076 = $ 336,924