Here is information for Zeus Ltd. for the 2012 calendar year: Total credit sales

Question

Here is information for Zeus Ltd. for the 2012 calendar year: Total credit sales $6,600,000 Accounts receivable at December 31 2,500,000 Accounts receivable written off during year 96,000 Accounts receivable later recovered (after write-off but before year end) 16,000 At the end of the year, uncollectible accounts were estimated to total $104,000 based on an aging schedule. Instructions (a) What amount of bad debts expense will Zeus record if Allowance for Doubtful Accounts has an opening credit balance of $40,000 on January 1? (b) Assume the same facts as in (a) except that there is a $20,000 opening credit balance in Allowance for Doubtful Accounts. What amount of bad debts expense will Zeus record? (c) What are the advantages of using the allowance method of reporting bad debts expense? Here is information for Zeus Ltd. for the 2012 calendar year: Total credit sales $6,600,000 Accounts receivable at December 31 2,500,000 Accounts receivable written off during year 96,000 Accounts receivable later recovered (after write-off but before year end) 16,000 At the end of the year, uncollectible accounts were estimated to total $104,000 based on an aging schedule. Total credit sales $6,600,000 Accounts receivable at December 31 2,500,000 Accounts receivable written off during year 96,000 Accounts receivable later recovered (after write-off but before year end) 16,000 Total credit sales $6,600,000 Accounts receivable at December 31 2,500,000 Accounts receivable written off during year 96,000 Accounts receivable later recovered (after write-off but before year end) 16,000 Instructions (a) What amount of bad debts expense will Zeus record if Allowance for Doubtful Accounts has an opening credit balance of $40,000 on January 1? (b) Assume the same facts as in (a) except that there is a $20,000 opening credit balance in Allowance for Doubtful Accounts. What amount of bad debts expense will Zeus record? (c) What are the advantages of using the allowance method of reporting bad debts expense? Instructions (a) What amount of bad debts expense will Zeus record if Allowance for Doubtful Accounts has an opening credit balance of $40,000 on January 1? (b) Assume the same facts as in (a) except that there is a $20,000 opening credit balance in Allowance for Doubtful Accounts. What amount of bad debts expense will Zeus record? (c) What are the advantages of using the allowance method of reporting bad debts expense? (a) What amount of bad debts expense will Zeus record if Allowance for Doubtful Accounts has an opening credit balance of $40,000 on January 1? What amount of bad debts expense will Zeus record if Allowance for Doubtful Accounts has an opening credit balance of $40,000 on January 1? (b) Assume the same facts as in (a) except that there is a $20,000 opening credit balance in Allowance for Doubtful Accounts. What amount of bad debts expense will Zeus record? Assume the same facts as in (a) except that there is a $20,000 opening credit balance in Allowance for Doubtful Accounts. What amount of bad debts expense will Zeus record? (c) What are the advantages of using the allowance method of reporting bad debts expense? What are the advantages of using the allowance method of reporting bad debts expense? Total credit sales $6,600,000 Accounts receivable at December 31 2,500,000 Accounts receivable written off during year 96,000 Accounts receivable later recovered (after write-off but before year end) 16,000

Explanation / Answer

(a)Allowance account currently has a credit balance of $40,000
The journal entry to record the Prov for bad debts would be as follows:

31 Dec 12 Bad debt expense Dr 224,000
Allow for doubtful accounts Cr 224,000
(Bad debt exp = Op Bal+ Uncollectible = 40000+(104000+96000-16000) =$2,24,000)

(b) The journal entry to record the Prov for bad debts would be as follows:

31 Dec 12 Bad debt expense Dr 204,000
Allow for doubtful accounts Cr 204,000
(Bad debt exp = Op Bal+ Uncollectible = 20000+(104000+96000-16000) =$2,04,000)

Allowance method is a better alternative to the direct write-off method because it is according to the matching principle of accounting. In allowance method, the doubtful debts are estimated and bad debts expense is recognized before the debts actually become uncollectible.

Bad debts expense is recognized early because bad debts are probable and they can be estimated to a fairly accurate extent therefore they fulfill the criteria required for recognition of contingent losses and it is necessary to recognize bad debts expense.

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