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Problem 7-4 Uncollectible accounts [LO7-5, 7-6] Raintree Cosmetic Company sells its products to c...

Problem 7-4 Uncollectible accounts [LO7-5, 7-6]

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 2017 balance sheet disclosed the following: Current assets: Receivables, 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. In addition, $3,000 was collected from a customer whose account was written off in 2017.

An aging of accounts receivable at December 31, 2018, reveals the following:

Age Group. Percentage of Year-End Percent Age Group Receivables in Group Uncollectible
0–60 days 65% 4%
61–90 days 20% 15%
91–120 days 10% 25%
Over 120 days 5% 40%

Required:

1. Prepare summary journal entries to account for the 2018 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: Bad debt expense is estimated to be 3% of credit sales for the year. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is determined by an aging of accounts receivable.

3. For situations (a) to (c) in requirement 2 above, what would be the net amount of accounts receivable reported in the 2018 balance sheet for each situation.

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Answer #1
Ques 1
Write Offs
General Journal Debit Credit
Allowance for uncollectible accounts 35000
   Accounts receivable 35000
Collection:
Accounts receivable 3000
   Allowance for uncollectible accounts 3000
Cash 3000
   Accounts receivable 3000
Ques 2
a.
Bad debt expense 52500
   Allowance for uncollectible accounts 52500
(1750000*3%)
b.
First we need balance to accounts receivable
Opening Balance $                  432,000
Add:credit sales $               1,750,000
Less:cash collections $            (1,830,000)
Less:write offs $                  (35,000)
Closing Balance $                  317,000
Now we record the entry
Bad debt expense 36700
   Allowance for uncollectible accounts 36700
(31700+35000-30000)
c.
0-60 days 317000*65%*4% 8242
61-90 days 317000*20%*15% 9510
91-120 days 317000*10%*25% 7925
over 120 days 317000*5%*40% 6340
total 32017
Now we record the entry
Bad debt expense 37017
   Allowance for uncollectible accounts 37017
Ques 3
a.317000-(52500-5000) $                  269,500
b.317000-31700 $                  285,300
c.317000-37017 $                  284,983
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