Concept explainers
Uncollectible accounts
• LO7–5, LO7–6
Raintree Cosmetic Company sells its products to customers on a credit basis. An
Current assets:
Receivables, net of allowance for uncollectible accounts of $30,000 $432,000
During 2018, credit sales were $1,750,000, cash collections from customers $1,830,000, and $35,000 in
Age Group | Percentage of Year-End Receivables in Group | Percent Uncollectible |
0–60 days | 65% | 4% |
61–90 days | 20 | 15 |
91–120 days | 10 | 25 |
Over 120 days | 5 | 40 |
Required:
- 1. Prepare summary
journal entries to account for the 2018 write-offs and the collection of the receivable previously written off. - 2. Prepare the year-end adjusting entry for
bad debts according to each of the following situations:- a. Bad debt expense is estimated to be 3% of credit sales for the year.
- b. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable.
- c. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is determined by an aging of accounts receivable.
- 3. For situations (a)–(c) in requirement 2 above, what would be the net amount of accounts receivable reported in the 2018 balance sheet?
(1)
Aging of receivables method:
A method of determining the estimated uncollectible receivables, based on the age of individual accounts receivable is known as aging of receivables method.
To prepare: A summary journal entries to account for the 2018 Write-offs and the collection of account receivables previously written off:
Explanation of Solution
Date | Account Title and Explanation | Post Ref | Debit ($) |
Credit ($) |
Allowance for uncollectible accounts | 35,000 | |||
Accounts Receivable | 35,000 | |||
(To record the write-off of receivables) |
Table (1)
The collection of account receivables previously written-off:
Date | Account Title and Explanation | Post Ref | Debit ($) |
Credit ($) | |
Accounts Receivable | 3,000 | ||||
Allowance for uncollectible accounts | 3,000 | ||||
(To record the reinstate the debt previously written off as bad) | |||||
Cash | 3,000 | ||||
Accounts Receivable | 3,000 | ||||
(To record the receipt of cash from the debt previously written off as bad) |
Table (2)
(2)(a)
To prepare: The year-end adjusting entry for bad debts according to each of the following situation:
Explanation of Solution
Bad Debts Expense – Percent of Credit Sales:
Date | Account Title and Explanation | Post Ref | Debit ($) |
Credit ($) |
Bad Debts Expense | 52,500 | |||
Allowance for uncollectible accounts | 52,500 | |||
(To record bad debts expense) |
Table (3)
Working note:
Compute the amount of monthly bad debts expense:
(b)
Bad Debts Expense – Percent of Year Balance of Accounts Receivable:
Explanation of Solution
Date | Account Title and Explanation | Post Ref | Debit ($) |
Credit ($) |
Bad Debts Expense | 36,700 | |||
Allowance for uncollectible accounts | 36,700 | |||
(To record bad debts expense) |
Table (4)
Compute the year-end balance of accounts receivable:
Accounts Receivable Accounts Analysis | |
Beginning balance including allowance
|
$462,000 |
Add: Credit Sales | 1,750,000 |
Less: Write-offs | (35,000) |
Less: Cash Collection | (1,830,000) |
Ending balance | $347,000 |
Table (5)
Working note:
Compute the amount of monthly bad debts expense:
Compute the bad debts expense:
Allowance for Uncollectible Accounts Analysis | |
Details | Amount ($) |
Beginning Balance | $30,000 |
Add: Collections of receivable previously written off as bad | 3,000 |
Less: Write-offs | (35,000) |
Balance before year-end Adjustments | (2,000) |
Less: Estimated Allowance | (34,700) |
Bad Debts Expense after Adjustments | $36,700 |
Table (6)
(c)
Entry Bad Debts Expense – Aging of Accounts Receivable
Explanation of Solution
Compute the estimated or targeted balance of Allowance for Uncollectible Accounts:
Estimated or targeted balance of Allowance for Uncollectible Accounts is determined by multiplying the estimated percentage of uncollectible with the estimated amount in each category.
R Company | |||||
Estimated Uncollected Accounts | |||||
31-Dec-18 | |||||
Details | Year End Accounts Receivable | Percentage of Uncollectible Accounts of Year End Accounts Receivable | Total Amount | Percentage Considered Uncollectible | Allowance for Doubtful Debts Accounts |
($) | ($) | ($) | (%) | ($) | |
[B × C] | |||||
A | B | C | D | E | F |
0-60 Days Past Due | $347,000 | 65% | 225,550 | 4% | 9,022 |
61-90 Days Past Due | 347,000 | 20% | 69,400 | 15% | 10,410 |
91-120 days Past Due | 347,000 | 10% | 34,700 | 25% | 8,675 |
Over 120 Days Past | 347,000 | 5% | 17,350 | 40% | 6,940 |
Total | 347,000 | 35,047 |
Table (7)
- Compute the bad debts expense:
Allowance for Uncollectible Accounts Analysis | |
Details | Amount ($) |
Beginning Balance | $30,000 |
Add: Collections of receivable previously written off as bad | 3,000 |
Less: Write-offs | (35,000) |
Balance before year-end Adjustments | (2,000) |
Less: Estimated Allowance | (35,047) |
Bad Debts Expense after Adjustments | $37,047 |
Table (8)
- Record the Entry:
Date | Account Title and Explanation | Post Ref | Debit ($) |
Credit ($) |
Bad Debts Expense | 37,047 | |||
Allowance for uncollectible accounts | 37,047 | |||
(To record bad debts expense) |
Table (9)
(3)
Explanation of Solution
The net amount of accounts receivable reported in the 2018 balance sheet is determined as follows:
Amount ($) | Amount ($) | Amount ($) | |
Assets: | (a) | (b) | (c) |
Current assets: | |||
Accounts receivable | 347,000 | 347,000 | 347,000 |
Less: Allowance for bad debts (a) | (50,500) | (34,700) | (35,047) |
296,500 | 312,300 | 311,953 |
Table (10)
Working note:
Calculate year end allowance for situation (a)
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