Question

Raintree Cosmetic Company sells its products to customers on a credit basis. An adjusting entry for bad debt expense is recorded only at December 31, the company’s fiscal year-end. The 2020 balance sheet disclosed the following: 

Current assets: 

   Receivables, net of allowance for uncollectible accounts of $46,000 $ 512,000 

During 2021, credit sales were $1,830,000, cash collections from customers $1,910,000, and $55,000 in accounts receivable were written off. In addition, $4,600 was collected from a customer whose account was written off in 2020. An aging of accounts receivable at December 31, 2021, reveals the following: 

Percentage of Year-End Percent Age Group Receivables in Group Uncollectible 0−60 days 60 % 3 % 61−90 days 10 5 91−120 days 20 25 Over 120 days 10 45 

Required:

 1. Prepare summary journal entries to account for the 2021 write-offs and the collection of the receivable previously written off.

 2. Prepare the year-end adjusting entry for bad debts according to each of the following situations: Bad debt expense is estimated to be 2% of credit sales for the year. Bad debt expense is estimated by adjusting the allowance for uncollectible accounts to the balance that reduces the carrying value of accounts receivable to the amount of cash expected to be collected. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable. Bad debt expense is estimated by adjusting the allowance for uncollectible accounts to the balance that reduces the carrying value of accounts receivable to the amount of cash expected to be collected. The allowance for uncollectible accounts is determined by an aging of accounts receivable.

 3. For situations (a)−(c) in requirement 2 above, what would be the net amount of accounts receivable reported in the 2021 balance sheet?

Answer 1

Answer 1:

Summary journal entries to account for the 2021 write-offs and the collection of the receivable previously written off:

Answer 2(a):

Bad debt expense is estimated to be 2% of credit sales for the year.

Bad debt expense = Credit sales * 2% = $1,830,000 * 2% = $36,600

Journal entry:

Answer 2(b):

Bad debt expense is estimated by adjusting the allowance for uncollectible accounts to the balance that reduces the carrying value of accounts receivable to the amount of cash expected to be collected. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable.

For this we need the ending balances of accounts receivable and allowances for uncollectible account before adjusting entry

We prepare below the T accounts of both:

Allowances for uncollectible required = 423000 * 10% = $42,300

We observe allowances for uncollectible account is habing debit balance of $4,400

Hence:

Bad debt expense = 42300 + 4400 = $46,700

Journal entry:

Answer 2(c):

Bad debt expense is estimated by adjusting the allowance for uncollectible accounts to the balance that reduces the carrying value of accounts receivable to the amount of cash expected to be collected. The allowance for uncollectible accounts is determined by an aging of accounts receivable.

Given:

Percentage of Year-End Percent Age Group Receivables in Group Uncollectible

0−60 days 60 % 3 %

61−90 days 10 %     5 %

91−120 days 20 % 25 %

Over 120 days 10 % 45 %

Allowances for uncollectible required = 423000 * 60% * 3% + 423000 * 10% * 5% + 423000 * 20% * 25% + 423000 * 10% * 45%

= $49,914

Hence:

Bad debt expense = 49914 + 4400 = $54,314

Journal entry:

Answer 3:

(a)  

Allowances for Uncollectible accounts ending balance will be = 36600 - 4400 =$32,200

Net amount of accounts receivable reported in the 2021 balance sheet = 423000 - 32200 = $390,800

Net amount of accounts receivable reported in the 2021 balance sheet = $390,800

(b):

Allowances for Uncollectible accounts ending balance will be = $46,700

Net amount of accounts receivable reported in the 2021 balance sheet = 423000 - 46700 = $376,300

Net amount of accounts receivable reported in the 2021 balance sheet = $376,300

(c):

Allowances for Uncollectible accounts ending balance will be = $54,314

Net amount of accounts receivable reported in the 2021 balance sheet = 423000 - 54314 = $368686

Net amount of accounts receivable reported in the 2021 balance sheet = $368,686