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)
Want to see more full solutions like this?
Chapter 7 Solutions
Intermediate Accounting
- What is the error correction (requiring retroactive restatement)?arrow_forwardExercise 7-16 (Static) Uncollectible accounts; allowance method; balance sheet approach; financial statement effects [LO7-5, 7-6] Colorado Rocky Cookie Company offers credit terms to its customers. At the end of 2024, accounts receivable totaled $625,000. The allowance method is used to account for uncollectible accounts. The allowance for uncollectible accounts had a credit balance of $32,000 at the beginning of 2024 and $21,000 in receivables were written off during the year as uncollectible. Also, $1,200 in cash was received in December from a customer whose account previously had been written off. The company estimates bad debts by applying a percentage of 10% to accounts receivable at the end of the year. Required: 1. Prepare journal entries to record the write-off of receivables, the collection of $1,200 for previously written off receivables, and the year-end adjusting entry for bad debt expense. 2. How would accounts receivable be shown in the 2024 year-end balance sheet?…arrow_forwardEstimating and reporting bad debts LO P2, P3 [The following information applies to the questions displayed below.] At December 31, 2017, Hawke Company reports the following results for its calendar year. Cash sales Credit sales $1,738,920 2,812,000 In addition, its unadjusted trial balance includes the following items. $852,036 debit 10,250 debit Accounts receivable Allowance for doubtful accountS Problem 9-2A Part 2 2. Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on its December 31, 2017, balance sheet given the facts in part la. Current assets:arrow_forward
- Sh14arrow_forwardpart d pleasearrow_forwardAsap Exercise 7-4 (Algo) Direct write-off method LO P1 Dexter Company uses the direct write-off method. March 11 Dexter determines that it cannot collect $10,000 of its accounts receivable from Leer Company. March 29 Leer Company unexpectedly pays its account in full to Dexter Company. Dexter records its recovery of this bad debt. Prepare journal entries to record the above transactions.arrow_forward
- es Exercise 7-12 (Algo) Uncollectible accounts; allowance method vs. direct write-off method [LO7-5, 7-6] Johnson Company calculates its allowance for uncollectible accounts as 10% of its ending balance in gross accounts receivable. The allowance for uncollectible accounts had a credit balance of $22,000 at the beginning of 2024. No previously written-off accounts receivable were reinstated during 2024. At 12/31/2024, gross accounts receivable totaled $366,700, and prior to recording the adjusting entry to recognize bad debts expense for 2024, the allowance for uncollectible accounts had a debit balance of 40,300. Required: 1. What was the balance in gross accounts receivable as of 12/31/2023? 2. What journal entry should Johnson record to recognize bad debt expense for 2024? 3. Assume Johnson made no other adjustment of the allowance for uncollectible accounts during 2024. Determine the amount of accounts receivable written off during 2024. 4. If Johnson instead used the direct…arrow_forwardExercise 7-4 (Algo) Direct write-off method LO P1 Dexter Company uses the direct write-off method. March 11 Dexter determines that it cannot collect $10,000 of its accounts receivable from Leer Company. March 29 Leer Company unexpectedly pays its account in full to Dexter Company. Dexter records its recovery of this bad debt. Prepare journal entries to record the above transactions.arrow_forwardQuestion 9 Concord Company provides for bad debt expense at the rate of 3% of accounts receivable. The following data are available for 2018: Allowance for doubtful accounts, 1/1/18 (Cr.) $ 11300 Accounts written off as uncollectible during 2018 10400 Ending accounts receivable 1204000 The Allowance for Doubtful Accounts balance at December 31, 2018, should be $37020. $900. $36120. $35220.arrow_forward
- QS 9-3 (Algo) Recovering a bad debt LO P1 Solstice Company determines on October 1 that it cannot collect $55,000 of its accounts receivable from its customer, P. Moore. It uses the direct write-off method to record this loss as of October 1. On October 30, P. Moore unexpectedly pays his account in full to Solstice Company.Record Solstice’s entries for recovery of this bad debt.arrow_forwardRequirea information Problems 7-2A (Algo) Estimating and reporting bad debts LO P2, P3 [The following information applies to the questions displayed below.] At December 31, Hawke Company reports the following results for its calendar year. Cash sales Credit sales In addition, its unadjusted trial balance includes the following items. Accounts receivable Allowance for doubtful accounts $ 100,000 $ 250,000 Problems 7-2A (Algo) Part 1 Required: 1. Prepare the adjusting entry to record bad debts under each separate assumption. View transaction list a. Bad debts are estimated to be 4% of credit sales. b. Bad debts are estimated to be 3% of total sales. c. An aging analysis estimates that 4% of year-end accounts receivable are uncollectible. Adjusting entries (all dated December 31). Journal entry worksheetarrow_forward! Required information Problem 7-2A (Algo) Estimating and reporting bad debts LO P2, P3 [The following information applies to the questions displayed below.] At December 31, Hawke Company reports the following results for its calendar year. Cash sales Credit sales In addition, its unadjusted trial balance includes the following items. Accounts receivable Allowance for doubtful accounts Problem 7-2A (Algo) Part 1 $ 50,000 $ 125,000 Required: 1. Prepare the adjusting entry to record bad debts under each separate assumption. View transaction listarrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningFinancial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College