Question

At the end of 2019, AlGhanem Company has accounts receivable of KW700,000 and an allowance for doubtful accounts of KW 50,000. On January 30, 2020, AlGhanem Company determined that its receivable from Al Shayaa Co. KW 10,000 will not be collected, and management authorized its write-off.

Instructions

a. Prepare the journal entry for AlGhanem Company to write off the Al Shayaa receivable.

b. What is the cash realizable value of AlGhanem Company's accounts receivable before the write-off of the Al Shayaa receivable?

c. What is the cash realizable value of AlGhanem Company 's accounts receivable after the write-off of the Al Shayaa receivable?

Answer 1

Allowance for doubtful account is created by estimating bad debt at the end of each year , against which bad debt expense are charge to Income statement . As Bad debt is already recognised so when the actual bad debt writeoff instead of again recognizing ie Debiting Bad debt Expense , it is Debited through the allowance for doubtful debt with were created .

a) Entry for Writeoff Al Shaya Receivable

	Debit	Credit
Allowance for doubtfull debt	KW 10000
To Account Receivable		KW 10000
( Being Bad debt written off )

b) Cash Realisable value of Account Receivable before written off bad debt

Account receivable Balance	KW 700,000
Less: Allowances for Doubtfull debt	KW 50000
Account Receivable Realisable in Cash (700000-50000)	KW 650,000

Cash realisable before writting off bad debt will be Total Account receible - Allowance Doubtful debt ( As this amount is already assume to be bad , and non realisable)

C. Cash realisable after writting of Account Receivable

Account Receivable balance ( 700000-10000)	KW 690000
Less Allowance for Doubtful debt ( 50000-10000)	KW 40000
Cash Realisable Account Receivable	KW 650000

There will be no change in cash realisable after writting off Account receivable for bad debt , as it is written off through allowances which were created . As Wrttibg of Account receivable reduce Account receible as well as allowance which is reduce by the amount of the debt which become actually bad .