Question

A) On December 31, 2017, SPK Corp reported the following information on its balance sheet:

Accounts Receivable                                                          $900,000

                Less: Allowance for Doubtful Accounts                 54,000 (credit)

During 2018, the company had the following transactions:

                Sales on account                                                                 $3,000,000

                Collections of accounts receivables                      2,850,000

                Write-off of accounts deemed uncollectible                     60,000

                Recovery of Bad debts previously written off                 12,000

                            (not included in collections above)

If bad debts are estimated to be 1.5% of credit sales, determine the ending balance in the Allowance for

Doubtful Accounts after the adjustment.

B) If bad debts are instead estimated to be 5% of year end receivables, determine SPR's Net Realizable Value after adjustment?

Answer 1

If bad debts are estimated at 1.5% of credit sales, then the current year provisions will be

$3,000,000 x 1.5% = $45,000

Bad debts written off in the current year will be adjusted against bad debts provisions and will also be reduced from Account Receivable

Recovery of bads debts previously written off will be added back to provision for doubtful debts

Profit and Loss Account
Debit			Credit
Particulars	Rs.	Rs.	Particulars	Rs.
Current year bad debts	60,000
Add:
Provision for current year	45,000
	1,05,000
Less:
Old Provision	54,000
Recovery of bad debts	12,000
	39,000	39,000

Provision for doubtful debts will have the ending balance as $45,000 and $39,000 will be debited to P&L account as additional provisions in the current year

Answer B

If bad debts are estimated to be 5% of year end receivables then first we have to find the Net Receivables balance at the year end

Sales	3,000,000
Add:
Opening balance in Account Receivable	900,000
	3,900,000
Less:
Collections during the year	2,850,000
Write-off of accounts deemed uncollectible	60,000
Net receivables	990,000

Provision for bad debts at 5% of year end receivables = 990,000 x 5% = $49,500

Net realisable value for account receivable = Net Receviables - Provision for bad debts = $990,000 - $45,000

= $940,500