Question

Refer to the information in E5–19, but now assume that the balance of the Allowance for Uncollectible Accounts on December 31, 2021, is $1,100 (debit) (before adjustment).

 

Required:

1. Record the adjustment for uncollectible accounts using the percentage-of-receivables method. Suzuki estimates 12% of receivables will not be collected.

2. Record the adjustment for uncollectible accounts using the percentage-of-credit-sales method. Suzuki estimates 3% of credit sales will not be collected.

3. Calculate the effect on net income (before taxes) and total assets in 2021 for each method.

 

E5-19

Suzuki Supply reports the following amounts at the end of 2021 (before adjustment).

Answer 1

Accounts receivable:

Accounts receivable is one of the current assets, which is reported at its net realizable value at the end of a particular period in the balance sheet. It is the amount to due from the customers to whom the goods or services are sold. The allowance for uncollectible accounts balance at the end of the period is reduced from the gross accounts receivable and reported in the balance sheet. Accounts receivable are also termed as clients.

 

Uncollectible Accounts Receivable:

These are the receivables that the company estimates to be uncollectible from its credit sales based on its past experience and collectability. Such uncollectable portion of credit sales is referred as bad debt, which should be considered as an expense and will be charged to income statement depending on their collectability and method of reporting followed.

 

Percentage-of-receivables method:

Under this method, the uncollectible accounts are measured on the basis of a percentage of the total accounts that are not expected to be collected.

 

Percentage-of-credit-sales method:

Under this method, the uncollectible accounts are adjusted on the basis of a percentage of the current year\'s credit sales that are not expected to be collected.

 

Journal entries:

Journal entry records the accounting transactions of a business in a journal book. All the business transactions are recorded in the chronological order using the double entry system of accounting.

 

(1)

Record the adjustment for uncollectible accounts using the percentage-of-receivables method, assuming 12% of receivables will not be collected:

Date	Account title & Explanation	Debit($)	Credit($)
31-Dec	Bad debt expense [($55,000 × 12%) + $1,1000	7,700
2021	Allowance for uncollectible accounts		7,700
	[To estimate the further bad debts.]

 

Explanation:

• Bad debts expense is an expense account and carries debit balance. It is increased on recognizing the uncollectible accounts. Hence, it is debited.

• Allowance for uncollectible accounts is a contra asset account and carries credit balance. It is increase for recognizing the allowance made on uncollectible amounts. Hence, it is credited.

 

(2)

Record the adjustment for uncollectible accounts using the percentage-of-sales method, assuming 3% of receivables will not be collected:

Date	Account title & Explanation	Debit($)	Credit($)
31-Dec	Bad debt expense [($260,000 × 3%)	7,800
2021	Allowance for uncollectible accounts		7,800
	[To estimate the further bad debts.]

 

Explanation:

• Bad debts expense is an expense account and carries debit balance. It is increased on recognizing the uncollectible accounts. Hence, it is debited.

• Allowance for uncollectible accounts is a contra asset account and carries credit balance. It is increase for recognizing the allowance made on uncollectible amounts. Hence, it is credited.

 

(3)

Calculate the effect on net income (before taxes) and total assets in 2021 for each method:

Particulars	Percentage of receivables method ($)	Percentage of credit sales method ($)
Total assets	(7,700)	(7,800)
Net income	(7,700)	(7,800)

 

Explanation:

Under percentage-of-receivables method, total assets and net income will be reduced by $7,700 and under percentage-of-credit-sales method, total assets and net income will be reduced by $7,800. So, the amount of adjustment is more in percentage of credit sales method in 2021 as compared to percentage-of-receivables method.

Accounts receivable:

Accounts receivable is one of the current assets, which is reported at its net realizable value at the end of a particular period in the balance sheet.