Question

The Femaware Company uses the allowance method to account for bad debts. At the beginning of year 1, the allowance account had a credit balance of $66,844. Credit sales for year 1 totaled $2,139,000 and the year end accounts receivable balance was $436,713. During this year, $65,061 in receivables were determined to be uncollectible. Femaware anticipates that 4% of all credit sales will ultimately become uncollectible. The fiscal year ends on December 31.

Required:

1. Does this situation describe a loss contingency? Explain.

2. What is the bad debt expense that Femaware should report in its year 1 income statement?

3. Prepare the appropriate journal entry to record the contingency.

4. What is the net realizable value (book value) Femaware should report in its year 1 balance sheet?

Answer 1

Answer -1

Yes, Farmaware Makes 4% of Credit Sales as Doubtful Debts and $65,061 becomes actually bad. Here is Contingency Loss of $85,560 i.e 4% of Credit Sales ( 4%*$2,139,000 )

Answer-2

Bad Debts Expenses is 4% of Credit Sales ( 4%*$2,139,000 ) i.e  $85,560 should be reported in year 1 income statement

Answer-3

the journal entry to record the contingency:

Bad Debts Expenses A/c Dr. $85560

Allowances for Doubtful Debts Cr. $85560

( Being Provision made for 4% of Credit Sale )

Allowances for Doubtful Debts Dr. $65061

Accounts Receivable Cr. $65061

( Being Actual Bad Debts adjusted with Accounts Receivables )

Profit & Loss A/c Dr. $85560

Bad Debts Expenses A/c Cr. $85560

( Recognition of Bad Debts amount in Income Statement)

Answer-4

Net realizable value (book value) of Accounts Receivable, Femaware should report in its year 1 balance sheet will be:

a) Balance of Allowances for Doubtful Debts will be at the end of the Year Will Be:

=Beginning Balance of Allowances for Doubtful Debts + Current Yera Provision - Actual Bad Debts

=$66844+$85560-$65061 =$87343

$87,343 is the ending balance of Allowances for Doubtful Debts

b) Year-end accounts receivable balance was $436,713

Net realizable value of Accounts Receivable will be at the end of the Year:

=Year End Accounts Receivable Balance-ending Balance of Allowances for Doubtful Debts

=$436713-$87343

=$3,49.370

So, $3,49.370 will be a Net realizable value of Accounts Receivable will be at the end of the Year and it should be reported in the Balance sheet