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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

At the end of 20-3, Martel Co. had $410,000 in Accounts Receivable and a credit balance of $300 in Allowance for Doubtful Accounts. Martel has now been in business for three years and wants to base its estimate of uncollectible accounts on its own experience.

Assume that Martel Co.’s adjusting entry for uncollectible accounts on December 31, 20-2, was a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts of $25,000.

  1. (a) Estimate Martel’s uncollectible accounts percentage based on its actual bad debt experience during the past two years.
  2. (b) Prepare the adjusting entry on December 31, 20-3, for Martel Co.’s uncollectible accounts.

1.

To determine

Calculate the M’s uncollectible accounts percentage.

Explanation

Percentage-of-receivables basis:

It is a method of estimating the bad debts (loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of receivables for a specific period. Under this method, the estimated bad debts would be treated as a target allowance balance.

Calculate the M’s uncollectible accounts percentage:

M’s uncollectible accounts percentage = Average uncollectible accountsAverage accounts receivable$17,150$350,000=4.9%

Working note 1:

Calculate the amount of average uncollectible accounts.

Average uncollectible accounts =[( Uncollectible accounts on December 21, 20-1 +Uncollectible accounts on December 21, 20-2)Credit balance in allowance for doubtful accounts2]=[(

2.

To determine

Prepare the adjusting entry to record the uncollectible accounts for M Company on December 31, 20-3.

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