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Raintree Cosmetic Company sells its products to customers on a credit basis. An adjusting entry for...

Raintree Cosmetic Company sells its products to customers on a credit basis. An adjusting entry for bad debt expense is recorded only at December 31, the company’s fiscal year-end. The 2020 balance sheet disclosed the following:

Current assets:  Receivables, net of allowance for uncollectible accounts of $44,000 $502,000

During 2021, credit sales were $1,820,000, cash collections from customers $1,900,000, and $53,000 in accounts receivable were written off. In addition, $4,400 was collected from a customer whose account was written off in 2020. An aging of accounts receivable at December 31, 2021, reveals the following:

age group Receivables in Group % Percent Uncollectible
0-60 65 4
61-90 15 10
91-120 15 30
120+ 5 50

Required:

1. Prepare summary journal entries to account for the 2021 write-offs and the collection of the receivable previously written off.
2. Prepare the year-end adjusting entry for bad debts according to each of the following situations:

  1. Bad debt expense is estimated to be 3% of credit sales for the year.
  2. Bad debt expense is estimated by adjusting the allowance for uncollectible accounts to the balance that reduces the carrying value of accounts receivable to the amount of cash expected to be collected. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable.
  3. Bad debt expense is estimated by adjusting the allowance for uncollectible accounts to the balance that reduces the carrying value of accounts receivable to the amount of cash expected to be collected. The allowance for uncollectible accounts is determined by an aging of accounts receivable.

3. For situations (a)−(c) in requirement 2 above, what would be the net amount of accounts receivable reported in the 2021 balance sheet?

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Answer #1
Answer to 1
In the books of Raintree Cosmetic Company
Journal Entries
Date Description Debit Credit
Accounts Receivable $       18,20,000
Sales $    18,20,000
(being sales made)
Cash $       19,00,000
Accounts Receivable $    19,00,000
(being cash collected)
Allowance for Doubtful debts $            53,000
Accounts Receivable $          53,000
(being doubtful debts written off)
Accounts Receivable $               4,400
Allowance for Doubtful debts $            4,400
(being debts written back)
Cash $               4,400
Accounts Receivable $            4,400
(being cash collected)
Answer to 2 (a)
When bad debts = 3% of credit sales for the year
          =1820000*3%
           =54,600
Date Description Debit Credit
Bad debts $            54,600
Allowance for Doubtful debts $          54,600
Answer to 2 (b)
Date Description Debit Credit
Bad debts (413000*10%) $            41,300
Allowance for Doubtful debts $          41,300
Answer to 2 (c )
Date Description Debit Credit
Bad debts $            45,843
Allowance for Doubtful debts $          45,843
Working
1. Calculation of gross amount of Trade receivable at the end on Dec 2021
Opening balance as on Jan 2021 $         5,46,000
Add: credit sales throughout the year $       18,20,000
Less: cash Collection $       19,00,000
Less: Debts written off $            53,000
Gross receivables at the end of Dec 2021 $         4,13,000
2. Aging Schedule of accounts receivable
Age of receivables Amount % of expected uncollectible Amount of uncollectibles
0-60 $                                          2,68,450 4% $          10,738
61-90 $                                             61,950 10% $            6,195
91-120 $                                             61,950 30% $          18,585
120+ $                                             20,650 50% $          10,325
$                                          4,13,000
Answer to 3
Net Accounts receivable to be reported on 2021 Balance Sheet
a b c
Accounts Receivable $                                          4,13,000 $         4,13,000 $      4,13,000
Allowance for Doubtful debts $                                             54,600 $            41,300 $          45,843
Net Receivable $                                          3,58,400 $         3,71,700 $      3,67,157
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