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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Entries related to uncollectible accounts

The following transactions were completed by Daws Company during the current fiscal year ended December 31:

Jan. 29. Received 35% of the $9,000 balance owed by Kovar Co., a bankrupt business, and wrote off the remainder as uncollectible.
Apr. 18. Reinstated the account of Spencer Clark, which had been written off in the preceding year as uncollectible. Journalized the receipt of $4,000 cash in full payment of Clark’s account.
Aug. 9. Wrote off the $11,850 balance owed by Iron Horse Co., which has no assets.
Nov. 7. Reinstated the account of Vinyl Co., which had been written off in the preceding year as uncollectible. Journalized the receipt of $7,000 cash in full payment of the account.
Dec. 31. Wrote off the following accounts as uncollectible (one entry): Beth Connelly Inc., $12,100; DeVine Co., $8,110; Moser Distributors, $21,950; Oceanic Optics, $10,000.
31. Based on an analysis of the $1,450,000 of accounts receivable, it was estimated that $60,000 will be uncollectible. Journalized the adjusting entry.

Instructions

  1. 1. Record the January 1 credit balance of $54,200 in a T account for Allowance for Doubtful Accounts.
  2. 2. Journalize the transactions. Post each entry that affects the following selected T accounts and determine the new balances:
  3. 3. Allowance for Doubtful Accounts
  4. 4. Bad Debt Expense
  5. 5. Determine the expected net realizable value of the accounts receivable as of December 31.
  6. 6. Assuming that instead of basing the provision for uncollectible accounts on an analysis of receivables the adjusting entry on December 31 had been based on an estimated expense of ½ of 1% of the sales of $13,200,000 for the year, determine the following:
  7. a. Bad debt expense for the year.
  8. b. Balance in the allowance account after the adjustment of December 31.
  9. c. Expected net realizable value of the accounts receivable as of December 31.

(1)

To determine

Accounts receivable

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Bad debt expense:

Bad debt expense is an expense account. The amounts of loss incurred from extending credit to the customers are recorded as bad debt expense. In other words, the estimated uncollectible accounts receivable are known as bad debt expense.

Direct write-off method:

This method does not make allowance or estimation for uncollectible accounts, instead this method directly write-off the actual uncollectible accounts by debiting bad debt expense and by crediting accounts receivable. Under this method, accounts would be written off only when the receivables from a customer remain uncollectible.

Allowance method:

It is a method for accounting bad debt expense, where amount of uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for doubtful account.

Two methods to estimate uncollectible accounts under allowance method are:

  • Percentage of sales method, and
  • Analysis of receivables method.

Percentage of sales method:

Credit sales are recorded by debiting (increasing) accounts receivable account. The bad debts is a loss incurred out of credit sales, hence uncollectible accounts can be estimated as a percentage of credit sales or total sales.

It is a method of estimating the bad debts (expected loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of net credit sale (or total sales) for a specific period. Under percentage of sales method, estimated bad debts would be treated as a bad debt expense of the particular period.

(1)

To record: January 1 credit balance of Allowance for doubtful accounts in a T-account.

Explanation

Prepare T-account for allowance for doubtful accounts to record its credit balance for January 1st.

Allowance for doubtful accounts
Date ...

(2)

To determine

To Journalize and post: The transactions of Company D.

(3)

To determine
The expected net realizable value of the accounts receivable as of December 31.

(4) (a)

To determine
The amount of bad debt expense for the year.

(4) (b)

To determine
The balance in the allowance for doubtful account after the adjustment of December 31.

(c)

To determine
The expected net realizable value of accounts receivable as of December 31.

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