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 2017 balance sheet disclosed the following:

Current assets:
Receivables, net of allowance for uncollectible accounts of $36,000	$	462,000

During 2018, credit sales were $1,780,000, cash collections from customers $1,860,000, and $41,000 in accounts receivable were written off. In addition, $3,600 was collected from a customer whose account was written off in 2017. An aging of accounts receivable at December 31, 2018, reveals the following:

	Percentage of Year-End		Percent
Age Group	Receivables in Group		Uncollectible
0–60 days	70	%	5	%
61–90 days	20		15
91–120 days	5		20
Over 120 days	5		40

Required:

1. Prepare summary journal entries to account for the 2018 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 4% of credit sales for the year.

Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable.

Bad debt expense is estimated by computing net realizable value of the receivables. 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 2018 balance sheet?

Answer 1

1)

Date	Account	Debit	credit
1	Allowance for uncollectible accounts	41000
	Accounts receivable		41000
	[being accounts written off]
2	Accounts receivable	3600
	allowance for uncollectible accounts		3600
	[being accounts writtten off earlier reversed]
	cash	3600
	Accounts receivable		3600

2)

Balance Of Accounts Receivable at end of 2018 : Beginning gross receivable +credit sales -collections -writeoff

[462000+36000]+1780000-1860000-41000

= 377000

Allowance for uncollectible accounts : 36000 beginning - 41000 writeoff +3600 reversed = -1400

Balance of uncollectible account as per aging method :[377000.70*.05]+[377000*.20*.15]+[377000*.05*.20]+[[377000*.05*.40]

= 13195+ 11310+3770+ 7540

= 35815

Date	Account	debit	credit
a	Bad debt expense	71200
	allowance for uncollectible accounts		71200
	[1780000*.04]
b	Bad debt expense	39100
	allowance for uncollectible accounts		39100
	[Bad debt expense recorded : [377000*.10]=37700+1400 debit balance in allowance]
c	Bad debt expense	37215
	allowance for uncollectible accounts		37215
	[Bad debt expense recorded :35815+1400 debit balance in allowance]

3)

Net realizable value =Gross receivable -allowance balance

A) 377000- 71200= $ 305800

B) 377000- 37700= $ 339300

C)377000-35815 = $ 341185