Module 7 Homework Use complete sentences, Show and label all work to receive any

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Module 7 Homework Use complete sentences, Show and label all work to receive any credit for the homework 4. Uncollectible Accounts-An analysis of Bill Melater's company accounts receivable reveals the following information: Accounts Receivable Accounts: Not yet due 1-30 days overdue 31-60 days overdue More than 60 days overdue $152,500 37,200 24,800 19,700 Bill's estimates of uncollectible accounts are one percent for those accounts not yet due, two percent for those 1-30 days overdue, five percent for those 31-60 days overdue, and ten percent for those more than 60 days overdue. The allowance for doubtful accounts has a debit balance of $600 before the adjusting entry is made. Cash sales for the period amounted to $12,000 and credit sales amounted to $100,000 a. Use the Balance Sheet approach to determine the necessary adjusting entry at the end of the current period. b. How will the Balance Sheet presentation appear under this approach? c. Prepare the journal entry to write off a specific customer's account amounting to $100. d. Determine if writing off a specific customer's account has any affect on the NRV of Accounts Receivable. e. Describe what the results would be for this problem if management were to use the Income Statement approach and that past experience indicates that 3.5% of credit sales are not collectible

Explanation / Answer

Solution:

Allowance for Doubtful Account Method

Under Allowance for Doubtful Debt method, the company uses an estimate for allowance for doubtful debt by using specified method and accordingly book Bad Debt Expenses for the period.

Allowance method creates bad debts expenses before the company knows specifically which customers will not pay on the basis of prior history and prior experience.

There are two approaches for recording of Bad Debt Expense under allowance for doubtful account method.

(i) Balance Sheet Approved or Accounts Receivable Aging Method -- Under this, on the basis of prior years’ experience company can reasonably estimated what percentage of accounts receivable measure will not be collected.

(ii) Income Statement Approach or Percentage on Credit Sales method --- under this method, company can reasonably estimate what percentage of credit sales will not be collected.

Part a ---

Calculation of Estimated Uncollectible Amount using balance sheet approach

Due

Accounts Receivable

Percentage of Uncollectible

Uncollectible Amount

(A)

(B)

(A*B)

Not Yet Due

$152,500

1%

$1,525

1-30 days

$37,200

2%

$744

31-60 days

$24,800

5%

$1,240

More than 60 days

$19,700

10%

$1,970

Total

$5,479

Total Estimated Uncollectible Amount for the period = $5,479

Generally, Allowance for Doubtful Accounts has credit balance. Since in the given question it is debit balance.

Unadjusted Debit Balance in Allowance for Doubtful Account is $600

Hence, we need to adjust the Allowance for Doubtful Account Debit balance $600 to the estimated uncollectible amount $5,479 credit balance.

To do this, we need to pass following adjustment entry

General Journal

Debit

Credit

Bad Debt Expense (600 + 5479)

$6,079

Allowance for Doubtful Accounts

$6,079

Hence, the Bad Debt Expense for the period is recorded as $6,079

Part b – Balance Sheet Presentation

Balance Sheet (partial)

Accounts Receivable

Less: Allowance for Doubtful Account

$6,079

Net Realizable Accounts Receivable

Part c ---

General Journal

Debit

Credit

Allowance for Doubtful Accounts

$100

Accounts Receivable

$100

Part d –

NRV of Accounts Receivable is calculated by deducting Allowance for Doubtful Account from Gross Accounts Receivable. Since the amount is adjusted within these two accounts. There will be no effect on NRV of Accounts Receivable.

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Pls ask separate question for remaining parts.

Due

Accounts Receivable

Percentage of Uncollectible

Uncollectible Amount

(A)

(B)

(A*B)

Not Yet Due

$152,500

1%

$1,525

1-30 days

$37,200

2%

$744

31-60 days

$24,800

5%

$1,240

More than 60 days

$19,700

10%

$1,970

Total

$5,479

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