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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Estimation versus Direct Write-Off of Bad Debts Blunt Company makes credit sales of $21,000 during the month of February 2019. During 2019, collections are received on February sales of $20,400, accounts representing $600 of these sales are written off as uncollectible, and a $100 account previously written off is collected.

Required:

  1. 1. Prepare the journal entries necessary to record the preceding information if (a) had debts are estimated as 3% of credit sales at the time of sale and (b) the bad debts are recorded as they actually occur.
  2. 2. Next Level Which method—recording bad debts at the time of sale or when they actually occuris preferred? Why?

1.

To determine

Prepare necessary journal entry to record the preceding information:

  1. (a) Bad debts estimated as 3% of credit sales at the time of sale.

 (b) Bad bets are recorded when they are actually occur.

Explanation

Account receivable:

The amount of money to be received by a company for the sale of goods and services to the customers is referred to as account receivable.

(a) Prepare necessary journal entry to record the bad debts estimated as 3% of credit sales at the time of sale.

DateAccount Titles and explanationDebit ($)Credit ($)
 Accounts receivable21,000 
      Sales revenue 21,000
 (To record the sale made )  

Table (1)

  • Accounts receivable is an asset and there is an increase in the value of asset. Hence, debit the accounts receivable by $21,000.
  • Sales revenue is component of stockholder’s equity and there is an increase in the value of revenue. Hence, credit the sales revenue by $21,000.
DateAccount Titles and explanationDebit ($)Credit ($)
 Bad debt expense630 
 

     Allowance for doubtful accounts

     ($21,000×3%)

 630
 (To record the 3% bad debt on the credit sales made)  

Table (2)

  • Bad debt expense is a component of stockholder’s equity and there is an increase in the value of expense. Hence, debit the bad debt expense by $630.
  • Allowance for doubtful accounts is a contra asset and there is a decrease in the value of asset. Hence, credit the allowance for doubtful accounts by $630.
DateAccount Titles and explanationDebit ($)Credit ($)
 Cash20,400 
      Accounts receivable 20,400
 (To record the cash collected on sales)  

Table (3)

  • Cash is an asset and there is an increase in the value of asset. Hence, debit the cash by $20,400.
  • Accounts receivable is an asset and there is an increase in the value of asset. Hence, debit the accounts receivable by $20,400.
DateAccount Titles and explanationDebit ($)Credit ($)
 Allowance for doubtful accounts600 
      Accounts receivable 600
 (To record the write off the sales that are  uncollectible )  

Table (4)

  • Allowance for doubtful accounts is a contra asset and there is an increase in the value of asset. Hence, debit the allowance for doubtful accounts by $600.
  • Accounts receivable is an asset and there is a decrease in the value of asset. Hence, credit the accounts receivable by $600.
DateAccount Titles and explanationDebit ($)Credit ($)
 Accounts receivable100 
      Allowance for doubtful accounts 100
 (To record the amount collected that were written off previously)  

Table (5)

  • Accounts receivable is an asset and there is an increase in the value of asset. Hence, debit the accounts receivable by $100.
  • Allowance for doubtful accounts is a contra asset and there is a decrease in the value of asset. Hence, credit the allowance for doubtful accounts by $100.
DateAccount Titles and explanationDebit ($)Credit ($)
 Cash100 
      Accounts receivable 100
 (To record the cash collected )  

Table (6)

  • Cash is an asset and there is an increase in the value of asset

2.

To determine

Identify and explain whether the method of recording bad debts at the time of sale or recording bad debts when they actually occur is preferable.

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