Question

Estimating and Recording Bad Debt Estimates and Write-offs; Reporting of Accounts Receivable

At December 31, 2020, its annual year-end, the accounts of Sun Systems Inc. show the following.

1. Sales revenue for 2020, $900,000, of which one-sixth was on account.
2. Allowance for doubtful accounts, balance December 31, 2019, $4,500 credit.
3. Accounts receivable, balance December 31, 2020 (prior to any write-offs of uncollectible accounts during 2020), $90,250.
4. Uncollectible accounts to be written off, December 31, 2020, $5,250.
5. Aging schedule at December 31, 2020, showing the following breakdown of total accounts receivable, excluding amounts to be written off.

Status	Amount
Not past due	Remainder
Past due 1–60 days	$20,000
Past due over 60 days	15,000

Required

a. Prepare the 2020 entry to write off the uncollectible accounts.

b. Prepare the 2020 adjusting entry to record bad debt expense for each of the following separate assumptions concerning expected bad debt loss rates. Note: Treat each of the following scenarios separately, they are independent of one another.

1. Bad debt expense is based on credit sales, 1.5%. (Hint: See p. 8-19: Alternative to Estimating Net Realizable Value)

2. The Allowance for Doubtful accounts is based on total receivables at year-end, 2.5%.

3. The Allowance for Doubtful accounts is based on aging schedule: not past due, 0.5%; past due 1–60 days, 1%; and past due over 60 days, 8%.

4. Bad debt expense is based on direct write-off method (assume entry in part a has not been recorded).

c. Prepare the 2020 balance sheet disclosure relating to accounts receivable for each assumption 1 through 4 of part b.

a.

Date	Account Name	Dr.	Cr.
Dec. 31, 2020	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer

b. Note: Treat each scenario separately, they are independent of one another.

1.

Date	Account Name	Dr.	Cr.
Dec. 31, 2020	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer

2.

Date	Account Name	Dr.	Cr.
Dec. 31, 2020	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer

3.

Date	Account Name	Dr.	Cr.
Dec. 31, 2020	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer

4.

Date	Account Name	Dr.	Cr.
Dec. 31, 2020	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer

c.  

Note: Do not use negative signs with your answers.

Balance Sheet, December 31, 2020	1	2	3	4
Accounts receivable	Answer	Answer	Answer	Answer
Less: Allowance for doubtful accounts	Answer	Answer	Answer	Answer
Accounts receivable, net	Answer	Answer	Answer	Answer

Answer 1

Part A

Date	Account titles and explanation	Debit	Credit
A	Allowance for doubtful accounts	5,250
	Accounts receivable		5,250
	To record account write off.

Part B1

Date	Account titles and explanation	Debit	Credit
B1	Bad debt expense (150000*1.5%)	2,250
	Allowance for doubtful accounts		2,250
	To record bad debts expense. Annual credit sales (900000*1/6 =150000)

Part B2

Beginning Balance Allowance for Doubtful Accounts [Credit balance]	4,500
Less: Account write off	5,250
Unadjusted Allowance for Doubtful Accounts (Debit balance)	(750)
Allowance of doubtful account (credit balance) after adjustment (90250*2.5%)	2,256
Add: Unadjusted Allowance for Doubtful Accounts [Debit balance] (debit balance means extra adjustment required to made.)	750
Adjustment of bad debts expense	3,006

Date	Account titles and explanation	Debit	Credit
B2	Bad debt expense	3,006
	Allowance for doubtful accounts		3,006
	To record bad debts expense.

Part B3

Due	Amount of Accounts receivable	Estimated Percentage of Uncollectable	Allowance of doubtful account
Note due (90250-20000-15000)	55,250	0.5%	276
0 to 60 days	20,000	1.0%	200
Over 60 days	15,000	8.0%	1,200
Allowance of doubtful account			1,676
Accounts receivable	90,250

Allowance of doubtful account (credit balance) after adjustment	1,676
Add: Unadjusted Allowance for Doubtful Accounts [Debit balance] (debit balance means extra adjustment required to made.)	750
Adjustment of bad debts expense	2,426

Date	Account titles and explanation	Debit	Credit
B3	Bad debt expense	2,426
	Allowance for doubtful accounts		2,426
	To record bad debts expense.

Part B4

Date	Account titles and explanation	Debit	Credit
B4	Bad debt expense	5,250
	Accounts receivable		5,250
	To record bad debts expense.

Part C

Answer	B1	B2	B3	B4
Unadjusted Allowance for uncollectible accounts (Minus =debit balance)	(750)	(750)	(750)
Add: Bad debts expense	2,250	3,006	2,426
Adjusted Allowance for uncollectible accounts	1,500	2,256	1,676
Balance sheet
Accounts receivable (90250-5250)	90,250	90,250	90,250	85,000
Less: Allowance for uncollectible accounts	1,500	2,256	1,676	-
Net Accounts receivable	88,750	87,994	88,574	85,000

Part 3