At December 31, 2011, Ethan Company reports the following results for its calend

Question

At December 31, 2011, Ethan Company reports the following results for its calendar year.

Cash sales.... $1,803,750
Credit sales....$3,534,000

In addition, its unadjusted trial balance includes the following items.

Accounts receivable..... $1,070,100 debit
Allowance for doubtful accounts.... $15,750 debit


Prepare the adjusting entry for this company to recongnize bad debts under each of the following independant assumptions.

C: An aging analysis estimates that 5% of year-end accounts are uncollectible






3: Show how accounts receivable and the allowance for doubtful accounts appear on its December 31, 2011, balance sheet given the facts in part 1C

Explanation / Answer

1. Prepare the following entry for this company to recognize bad debts under each of the following independent assumptions. a) Bad debts are estimated to be 2% of credit sales. With percentage of sales the current balance in the allowance account is ignored. 3,534,000 x 2% = 70,680 Dr Bad Debt Expense 70,680 Cr Allowance for Doubtful Accounts 70,680 The Allowance account now has a credit balance of 70,680 - 15,750 = $54,930 b) An aging analysis estimates that 5% of year-end accounts receivable are uncollectible. When using percentage of receivables, the Allowance account must be taken into consideration. 1,070,100 x 5% = 53,505 amount estimated to be uncollectible. Since there is a debit balance in the Allowance account, that is added to the previous amount. 53,505 + 15,750 = $69,255 amount of adjustment Dr Bad Debt Expense 69,255 Cr Allowance for Doubtful Accounts 69,255 The Allowance account now has a credit balance of 53,505, the same amount that is estimated to be uncollectible. 2. Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on its December 31, 2011, balance sheet given the facts in part 1a. Accounts Receivable $1,070,100 Less: Allowance for Doubtful Accounts 54,930 Net Accounts Receivable $1,015,170 3. Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on its December 31, 2011, balance sheet given the facts in part 1b. Accounts Receivable $1,070,100 Less: Allowance for Doubtful Accounts 53,505 Net Accounts Receivable $1,016,595

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