Question

 

Munchener Corp.’s unadjusted trial balance includes the following balances:

	Dr.	Cr.
Accounts receivable	$150,000
Allowance for doubtful accounts		$ 3,500
Sales (all on credit)		720,000
Sales returns and allowances	30,000

Required

1.      Prepare the entries for estimated bad debts assuming that doubtful accounts are estimated to be (a) 5% of gross accounts receivable and (b) 2% of net sales.

2.      Assume that all the information above is the same, except that the Allowance for Doubtful Accounts has a debit balance of $3,500 instead of a credit balance.

Answer 1

Required 1:

Answer:

(a)

Bad debt expense	4,000
Allowance for doubtful accounts		4,000

(b)

Bad debt expense	13,800
Allowance for doubtful accounts		13,800

Calculation:

(a)

Here we need to calculate the estimated bad debts assuming that doubtful accounts are estimated to be 5% of gross accounts receivable. So, to calculate the total allowance needed, we need to find the 5% of the gross receivable which is 150,000. Then as the allowance has a credit balance, we need to deduct it from the total allowance.

Percentage of receivables approach:

Gross receivables	150,000
Rate	5%
Total allowance needed	7,500
Present allowance	(3,500)
Bad debt expense	4,000

(b)

Here we need to calculate the estimated bad debts assuming that doubtful accounts are estimated to be 2% of net sales. So, to calculate the total allowance needed, we need to find the 2% of net sales.

Hence, we need to first calculate the net sales.

Net sales = Sales - Sales return and allowances

The bad debt expense is the 2% of the net sales. So we need to multiply the rate with the net sales.

Percentage of sales approach:

Sales	720,000
Sales return and allowances	(30,000)
Net sales	690,000
Rate	2%
Bad debt expense	13,800

Required 2:

Answer:

(a) The bad debt expense estimated will increase in the percentage of receivales method:

Bad debt expense	11,000
Allowance for doubtful accounts		11,000

(b) No change in the percentage sales method:

Bad debt expense	13,800
Allowance for doubtful accounts		13,800

Calculation:

(a)

Here the assumption is that the allowance for Doubtful Accounts has a debit balance of $3,500 instead of a credit balance

We need to calculate the estimated bad debts assuming that doubtful accounts are estimated to be 5% of gross accounts receivable. So, to calculate the total allowance needed, we need to find the 5% of the gross receivable which is 150,000. Here, the allowance for Doubtful Accounts has a debit balance of $3,500 instead of a credit balance. So need to add it to the total allowance.

Percentage of receivables approach:

Gross receivables	150,000
Rate	5%
Total allowance needed	7,500
Present allowance	3,500
Additional amount equired	11,000

In the percentage of receivables method, the bad debt expense estimated will increase to 11,000 from 4,000.

(b).

There wont be any change to the amount or entry if we use the percenatage of sales method as wont consider the Allowance for doubtful accounts in the Percentage of sales approach.