Question

On Dec 31, 2016, Riyadh Company had accounts:

1. Credit sales                                                                             $2,500,000
2. Ending accounts receivable                                                         800,000
3. Sales discousnts                                                                          120,000
4. Sales returns and allowances                                                       280,000
5. Beginning accounts receivable                                                   750,000
6. Allowance for doubtful accounts (credit)                                     12,000            
7. The aging schedule (aging method) for the company’s accounts receivable is shown in the following table:

# of Days Outstanding	Amounts	Estimated % Uncollectible
0-30	$     100,000	2%
31-60	300,000	4%
61-90	300,000	6%
Over 90	100,000	8%

Requirements:

1. If the compnay’s use the percentage of net credit sales method (3%) to estimate its allowance for the doubtful accounts, answer the following two questions:

• What is the balance of the allowance for doubtful accounts on Dec 31, 2016?
• What is the bad debt expense that should be reported in the 2016 income statement?

2. If the compnay’s use the percentage of the aging method of accounts receivable to estimate its alloance for the doubtful accounts, what is the required balance for the the doubtful accounts on Dec 31, 2016?
   • What is the balance of the allowance for doubtful accounts on Dec 31, 2016?
   • What is the bad debt expense that should be reported in the 2016 income statement?

Answer 1

1. If the company uses the percentage of net credit sales method

Under this method bad debts expense is calculated as percentage of credit sales of the period. Bad debts expense is calculated via the following formula: Bad Debts Expense = Estimated % × Credit Sales

After the estimation of bad debts, an adjusting entry is passed to recognize bad debts expense. The entry involves a debit to bad debts expense account and a credit to allowance for doubtful debts account

Bad debts expense = 3% * $2,500,000 = $75,000

The Bad debts expense account will be debited by $75,000 and allowance for doubtful accounts will be credited by $75,000.

Balance of allowance for doubtful accounts will be $87,000 (12,000+75000)

Bad debts expense for the period will be $75,000

2. If the company uses the percentage of the aging method of accounts receivable

# of Days Outstanding	Amounts	Estimated % Uncollectible	Estimated uncollectible amounts
0-30	100000.00	0.02	$ 2,000.00
31-60	300000.00	0.04	$ 12,000.00
61-90	300000.00	0.06	$ 18,000.00
Over 90	10,000.00	0.08	$ 800.00
	710,000.00		$ 32,800.00

The balance of doubtful accounts as on Dec 31, 2016 is $ 677,200 ($710,000-$32,800)

The balance of allowance of doubtful debt accounts is $ $44,800 (12,000+32,800)

The bad debts expense that should be reported is $32,800.