Question

Raintree Cosmetic Company sells its product to customers on a credit basis. An adjusting entry for uncollectible accounts expense is recorded only at December 31, the company's fiscal year-end. The 2018 balance sheet disclosed the following: Current Assets: Accounts Receivable, net of allowance for uncollectible accounts of $30,000 $432,000 During 2018, credit sales were $1,750,000, cash collections from customers $1,830,000, and $35,000 in accounts receivable were written off. An aging of receivable at December 31, 2018, reveals the following: Percentage of Year-end Receivables in Group 65% Age Group 0-60 days 61 - 90 days 91 - 120 days Over 120 days Percent Uncollectible 4% 15% 25% 40% 10% 5% What is the balance in the Accounts Receivable account at 12/31/2019? (Hint: Ute a T-account to post all the information provided above that impacts the Accounts Receivable account in 2019) Calculate the amount of bad debt expense to be recorded at 12/31/2019, assuming each of the following independent situations: a. Bad debt expense is estimated to be 3% of credit sales for the year. b. Bad debt expense is calculated using the results of the aging analysis performed at year-end. NOTE: Using an aging of accounts receivable is one approach for using the gross receivables method. Using an aging approach applies a different percentage to each aging category in determining the desired ending balance in the allowance account rather than using a single percentage. An aging approach is more precise because you are adjusting the percentage based on the age of the accounts, the older the account the more likely it is to become uncollectible.

Answer 1

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Raintree Cosmetic
Workings for Answer 1
Calculation of opening Gross Receivables:	Amount $
Net Receivables	432,000.00
Add: Allowance for uncollectible accounts	30,000.00
Net Gross Receivables	462,000.00
Answer 1
T Account- Accounts Receivable
Date	Account	Debit $	Date	Account	Credit $
	Opening Balance	462,000.00		Cash	1,830,000.00
	Sales	1,750,000.00		Allowance for uncollectible accounts	35,000.00
				Closing Balance	347,000.00
		2,212,000.00			2,212,000.00
So balance in accounts receivable as on 31st Dec 2018 is $ 347,000.
Workings for Answer 2 a and b.
Unadjusted- Allowance for uncollectible accounts	Amount $
Allowance for uncollectible accounts- Opening	30,000.00
Less: accounts receivable written off	35,000.00
Unadjusted- Allowance for uncollectible accounts	(5,000.00)
Answer 2 a
Bad debt expense at year end:
Credit Sales	1,750,000.00
Allowance %	3%
Allowance amount	52,500.00
Less: Unadjusted- Allowance for uncollectible accounts	(5,000.00)
Bad debt expense at year end:	57,500.00
Answer 2 b
Age Group	Year end Receivables	% of Year end Receivables	Receivables	% Uncollectible	Allowance amount
0-60 days	347,000.00	65%	225,550.00	4%	9,022.00
61-90 days	347,000.00	20%	69,400.00	15%	10,410.00
91-120 days	347,000.00	10%	34,700.00	25%	8,675.00
Over 120 days	347,000.00	5%	17,350.00	40%	6,940.00
Total			347,000.00		35,047.00
Bad debt expense at year end:
Allowance amount	35,047.00
Less: Unadjusted- Allowance for uncollectible accounts	(5,000.00)
Bad debt expense at year end:	40,047.00