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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

Providing for doubtful accounts

At the end of the current year, the accounts receivable account has a debit balance of $6,800,000 and sales for the year total $81,500,000. Determine the amount of the adjusting entry to provide for doubtful accounts under each of the following assumptions:

  1. a. The allowance account before adjustment has a debit balance of $68,250. Bad debt expense is estimated at ¾ of 1% of sales.
  2. b. The allowance account before adjustment has a debit balance of $68,250. An aging of the accounts in the customer ledger indicates estimated doubtful accounts of $575,000.
  3. c. The allowance account before adjustment has a credit balance of $45,000. Bad debt expense is estimated at ½ of 1% of sales.
  4. d. The allowance account before adjustment has a credit balance of $45,000. An aging of the accounts in the customer ledger indicates estimated doubtful accounts of $450,000.

(a)

To determine

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:

  1. 1. Percentage of sales method, and
  2. 2. 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.

Analysis of receivables method:

A method of determining the estimated uncollectible receivables based on the age of individual accounts receivable is known as analysis of receivables method. This method is otherwise known as aging of receivables method. Under analysis of receivables method, estimated bad debts would be treated as the desired adjusted balance for allowance for doubtful accounts.

Allowance for doubtful account is a contra asset account, whose normal balance is a credit balance.

To determine: The amount of the adjusting entry to provide for doubtful accounts under each assumption.

Explanation

Since bad debts are estimated under percentage of sales method, the determined amount of $611,25...

(b)

To determine
The amount of the adjusting entry for doubtful accounts, if estimated doubtful accounts under aging of receivables method is $575,000.

(c)

To determine
The amount of the adjusting entry for doubtful accounts, if bad debts are estimated at 1/2 of 1% of sales.

(d)

To determine
The amount of the adjusting entry for doubtful accounts, if estimated doubtful accounts under aging of receivables method is $450,000.

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