Question

At December 31, 2017, Engel Company had a balance of $770,000 in its Accounts Receivable account and an unused balance of $7,000 in its Allowance for Doubtful Accounts.  The company then analyzed and aged its accounts receivable as follows:

            Current                                                           $468,000

            1-60 days past due                                           244,000

            61-180 days past due                                        38,000

            Over 180 days past due                                     20,000

                                                                                    -------------

Total accounts receivable                                         $770,000

                                                                                    ========

In the past, the company experienced losses as follows:  1% of current balances, 5% of balances 1-60 days past due, 15% of balances 61-180 days past due, and 40% of balances over 180 days past due.  The company bases its provision for credit losses on the aging analysis.

Required:

Report the each of the following transactions as journal entries and then post the amounts to the appropriate T-accounts.

a) Bad debts expense estimate at $23,580 assuming that there is an unused balance of $7,000 in the Allowance for Doubtful Accounts.

b) Write off $5,000 in customer accounts.

Answer 1

Allowance for doubtful accounts is created to generate provision for estimated bad debts.

Allowance for doubtful accounts have a credit balance.

The bad debts for current year will be the estimated bad debts less any available allowance for doubtful account balance.

bad debts estimation

		percentage	estimated bad debts
current balance	$468,000	1%	$4,680[468,000*1%]
1-60	$244,000	5%	$12,200[244,000*5%]
61-180	$38,000	15%	$5,700[38,000*15%]
over 180 days	$20,000	40%	$8,000[20,000*40%]
		estimated bad debts	$30,580

however there is already balance of unused allowance so bad debts expense would be = $30,580-$7,000=

$23,580

journal entry

	Number	Journal	debt	credit
	a)	Bad debts expense	$23,580
		Allowance for doubtful account		$23,580
	b)	allowance for doubtful account	$5,000
		Accounts receivable		$5,000

when the actual customer defaults than account receivable will be credited and allowance balance will be reduced by debiting it.

T ACCOUNTS

Bad debt expenses
a)	23,580
end bal.	$23,580
Allowance for doubtful account
b)	$5,000	$7,000	beginning bal.
		$23,580	a)
		$25,580	end bal.
Account receivable
Beg. bal.	$770,000	$5,000	a)
end bal.	$765,000