Question

In: Accounting

Refer to the information in BE5–17, but now assume that the balance of Allowance for Uncollectible Accounts before adjustment is $4,000 (debit).

Refer to the information in BE5–17, but now assume that the balance of Allowance for Uncollectible Accounts before adjustment is $4,000 (debit). The company still estimates future uncollectible accounts to be 3% of credit sales for the year. What adjustment would Brinkley record for Allowance for Uncollectible Accounts using the percentage-of-credit-sales method?

BE5-17

At the end of the year, Brinkley Incorporated’s balance of Allowance for Uncollectible Accounts is $4,000 (credit) before adjustment. The company estimates future uncollectible accounts to be 3% of credit sales for the year. Credit sales for the year total $135,000. What is the adjustment Brinkley would record for Allowance for Uncollectible Accounts using the percentage-of-credit-sales method?

Expert Solution

Accounting for doubtful debts accounts:

Allowance method:

It is a method of writing off of bad debts expense. In this method the company does not wait for the bad debts to occur, rather it estimates the amount of bad debts before its occurrence. It is an estimation of extra funds from the sales or any other source which is set aside to be paid off for bad debt when bad debt arises.

Percentage of Net Credit Sales method is a method to calculate the amount of allowance for uncollectible accounts. In this method the uncollected amount is calculated as a percentage of net credit sales. This method determines the amount that will not to be collected from this year’s net sales only. It does not consider the previous balance of allowances for uncollectible account.

Prepare the adjusting entry to record the bad debts expense for B Company

Step 1: Calculate the total amount of Allowance for doubtful debt accounts.

Net credit sales = $135,000

Doubtful debts expense = 3% of Net credit sales

Allowance for Doubtful Debts = 3% of Net credit sales

= $135,000 × 3%

= $4,050

Following is the accounting equation for the allowance for doubtful debts:

Assets = Liabilities + Stockholders’ Equity

-$4,050(Allowance for Uncollectible Accounts) = -$4,050(Bad Debts Expense)

Record the following journal entry in the general journal.

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
	Bad Debts Expense (E–)		4,050
	Allowance for uncollectible accounts (A–)			4,050
	(To record the adjusting entry of bad debts expense)

• Bad debts expense decreased equity by $4,050. Therefore, debit bad debts expense accounts with $4,050.

• Allowance for uncollectible accounts is a contra account and decreases the asset, by $4,050. Therefore, credit Allowance for uncollectible accounts with $4,050.

Note:

• The percent of credit sales method does not consider the previous balance of the allowance for uncollectible account.

• Hence, the previous debit balance of the allowance for uncollectible account of $4,000 will not be taken into consideration for the calculation of the estimated bad debts.

Accounting for doubtful debts accounts:

Allowance method:

It is a method of writing off of bad debts expense. In this method the company does not wait for the bad debts to occur

Junaid answered 2 years ago

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