On December 31, 2017, Corotel Company\'s year-end, the unadjusted trial balance

Question

On December 31, 2017, Corotel Company's year-end, the unadjusted trial balance included the following items Account Debit Credit Accounts receivable Allowance for doubtful accounts Sales ($3,030,000 cash sales) $2,120,000 35,000 $12,120,000 Reguired: 1. Prepare the adjusting entry needed in Corotel's books to recognize bad debts under each of the following independent assumptions. a. Bad debts are estimated to be 2% of credit sales. b. An analysis suggests that 5% of outstanding accounts receivable on December 31, 2017, will become uncollectible

Explanation / Answer

Part 1(a) – Record the estimate for uncollectible accounts (Bad debts are estimated to be 2% of credit sales)

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.

Percentage of Sales method, in this method the bad debts are estimated based on the estimated percentage on credit sales.

Estimated Uncollectible Amount = Credit Sales x 2%

Credit Sales =Total Sales 12,120,000 – Cash Sales 3,030,00 = $9,090,000

Estimated Uncollectible Amount = Credit Sales 9,090,000 x 2% = $181,800

Allowance for doubtful accounts has Debit balance of $35,000. Normally this account is having credit balance. Now we need to adjust this account to make it credit balance $181,800.

We need to Credit Allowance for Doubtful Account with $216,800 (181,800 + 35,000) and Debit Bad Debt Expense with $216,800.

Journal Entry will be as follows

No.

Account Titles and Explanation

Debit

Credit

1(a)

Bad Debt Expense

$216,800

Allowance for Doubtful Account

$216,800

Part 1(b) – Record the estimate for uncollectible accounts

Outstanding Accounts Receivable at the end of year = $2,120,000

Estimated Uncollectible Amount = 5% of Outstanding Balance of Accounts Receivable $2,120,000 = $106,000

Allowance for doubtful accounts has Debit balance of $35,000. Normally this account is having credit balance. Now we need to adjust this account to make it credit balance $106,000

We need to Credit Allowance for Doubtful Account with $141,000 (106,000 + 35,000) and Debit Bad Debt Expense with $141,000

Journal Entry will be as follows

No.

Account Titles and Explanation

Debit

Credit

1(b)

Bad Debt Expense

$141,000

Allowance for Doubtful Account

$141,000

Part 2(a) – Balance Sheet (Partial)

Partial Balance Sheet

Assets

   Current Assets:

      Accounts Receivable

$2,120,000

      Less: Allowance for Doubtful Account (1(a))

-$216,800

      Accounts Receivable, net

$1,903,200

Part 2(b) – Balance Sheet (Partial)

Partial Balance Sheet

Assets

   Current Assets:

      Accounts Receivable

$2,120,000

      Less: Allowance for Doubtful Account (1(b))

-$141,000

      Accounts Receivable, net

$1,979,000

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

No.

Account Titles and Explanation

Debit

Credit

1(a)

Bad Debt Expense

$216,800

Allowance for Doubtful Account

$216,800

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