Question

Allowance Method Review - The Allowance Method (GAAP) V. Direct Write-Off Method

Nathans Corp., manufactures hot dogs, reports the following information before adjusting for 2010 Bad Debt Expense.

                                                                                            Dr.                 Cr.

Accounts Receivable………………………                   $ 100,000

Allowance for Uncollectibles……..…..                                                 $ 10,000

Sales Revenue (all on credit)………….                                                 $500,000

Sales Returns and Allowances………..                       $100,000      

Sales Discounts………………………………             $   50,000

Valuation of Accounts Receivable – Allowance Method for Uncollectible Accounts

Recording Bad Debts- Bases Used for Allowance Method

- Please write the correct journal entry to record Bad Debt expense assuming Nathans Corp. estimates bad debt expense at 3% of Net Sales.

- Please indicate the ending balance in Allowance for Uncollectibles.

Note: Under the Percentage of Sales Method, a journal entry to record Bad Debt Expense and Allowance for Uncollectibles is recorded with each credit sale.  

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Valuation of Accounts Receivable – Allowance Method for Uncollectible Accounts

Recording Bad Debts - Bases Used for Allowance Method

Which is the correct journal entry to record Bad Debt expense assuming Nathans Corp. estimates bad debt expense at 12% of Accounts Receivable.

Note: Percentage of Accounts Receivable at Year-end Method: (Uses the Balance Sheet )

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Allowance for Uncollectibles at year-end = % of year-end Accounts Receivables

Valuation of Accounts Receivable – Allowance Method for Uncollectible Accounts

Recording Bad Debts Aging of Receivables Method

_______________________________________________________________________________________________

                                   HEB Inc.

                                Aging Schedule

_______________________________________________________________________________________________

Classification by      Balances in               Estimated %                    Estimated

By Due Date              Each Category          Uncollectible            Uncollectible Acct.

Current                      $10,000                                 .02                               $ 200

31-61 days                $ 7,000                                 .04                              $ 280

61-90 days                 $   5,000                               .15                              $ 750

Over 90 days              $   4,000                               .25                              $1000

                                     $26,000                                                                   $2,230           

Note: Aging of Receivables Method (Uses the Balance Sheet)

Answer 1

Solution 1:

Bad debts expense is 3% of net sales:

Net Sales = $500,000 - $100,000 - $50,000 = $350,000

Adjsuting Journal Entries
Particulars	Debit	Credit
Bad debts expense Dr ($350,000*3%)	$10,500.00
To Allowance for uncollectible accounts		$10,500.00
(To record bad debts provision)

Ending balance of Allowance for Uncollectibles. = $10,000 + $10,500 = $20,500

Solution 2:

Bad debts expense at 12% of accounts receivables:

Estimated bad debts at the end of year = $100,000*!2% = $12,000

Balance in allowance for uncollectibles = $10,000

Bad debts expense to be recorded = $12,000 - $10,000 = $2,000

Adjsuting Journal Entries
Particulars	Debit	Credit
Bad debts expense Dr	$2,000.00
To Allowance for uncollectible accounts		$2,000.00
(To record bad debts provision)

Ending balance of Allowance for Uncollectibles. = $12,000

Solution 3:

Ageing of receivables method:

Required bad debts expense = $2,230

Balance in allowance for uncollectible not given, therefore it will be considered as nil.

Adjsuting Journal Entries
Particulars	Debit	Credit
Bad debts expense Dr	$2,230.00
To Allowance for uncollectible accounts		$2,230.00
(To record bad debts provision)