Read the following information to answer questions 2.1 - 2.2. LA Fashion has credit sales of $6,400,000 for the financial year ending June 30, 2021, and estimates at the end of the financial year that five per cent of accounts receivable will not be received. Accounts receivable total $3,100,000. The corporation uses the allowance method to account for bad debts, based on the percentage of receivables approach.
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
![Question 2.1:
During 2021 a customer defaults on a $18,000 balance related to goods purchased during 2021.
The corporation determines that this amount will not be recoverable and removes it from their
records. Identify the accounts used in the journal entry to remove the amount from their records
(noting above, that the corporation uses the allowance method to account for bad debts).
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18,000
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18,000
Question 22
Question 2.2
Using the percentage of receivables approach to calculate the amount of bad debt expense incurred,
record the adjusting entry for the bad debt expense for the financial year end June 30, 2021. The
credit balance in the "allowance for bad debts" account is $34,000 prior to the adjusting entry.
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