York Yoyos began 2008 with a debit balance in Accounts Receivable of $4,320,000
ID: 2344906 • Letter: Y
Question
York Yoyos began 2008 with a debit balance in Accounts Receivable of $4,320,000 and a credit balance in Allowance for Doubtful accounts of 81,000. During the year, York Yoyos sold $11,107,000 of product and collected $12,300,000 from customers. In addition during the year York wrote off $31,000 of Accounts Receivable as uncollectible. Management uses the allowance method to account for bad debts in 2008. York estimated that ultimately 4% of its year-end balance in Accounts Receivable will not be collected. How much bad debt expense will be recorded in 2008
Explanation / Answer
The movements of the accounts:
Accounts receivable
4,320,000(beginning balance) + 11,107,000(credit sales, I amassuming that all of the sales are on credit) - 12,300,000( collection) - 31,000(write off) = 3,096,000(ending balance)
Allowance for doubtful accounts
81,000(beginning) - 31,000(write off) = 50,000(ending before year-end adjustment)
Year-end adjustement
We want to make the amount of Alloance for doubtful accounts to be 4% of the ending balance of Accounts receivable. So,
3,096,000 * 4% = 123,840 <------ this should be the ending balance of Allowance for doubtful accounts.
To make the amount of Allowance for doubtful accounts to be 123,840, we enter the following journal as an year-end adjustment.
Dr. Bad debt expense 73,840 <---------- 123,840 - 50,000(ending balance before adjustment)
Cr. Allowance for doubtful accounts 73,840
By the way, to make you understand this problem better, here are the journal entries recorded during the year.
Credit sales:
Dr. Accounts receivable 11,107,000
Cr. Sales revenue 11,107,000
Collection of Accounts receivable
Dr. Cash 12,300,000
Cr. Accounts receivable 12,300,000
Accounts receivable write off
Dr. Allowance for doubtful accounts 31,000
Cr. Accounts receivable 31,000
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