Question

Claireco uses the allowance method to write off all bad debts. On 12/31/XX an aged accounts receivable indicated that bad debt expense would be $35,000. The balance in the Allowance account on that date was a credit of $8,000. It was also estimated that the bad debts expense for the year would be 1% of the years credit sales of $4,000,000. Required: A. Assume that you want to inform the banking industry what your bad debt exposure will be, make the journal entry required on 12/31/XX. B. Assume that you want to inform the stockholders what your bad debt exposure will be, make the journal entry required on 12/31/XX

Answer 1

      Claireco use the allowance method to write off all bad debts . On 31/12 /XX, Bad debt expenses $ 35000. The balance in the Allowance account on that date $ 8000 Credit .

1. Assume that you want to inform Banking Industry – In this case , We already have credit balance $ 8000 k and new bad debt allowance $ 35000 , so balance amount need to account :

Bad Debt Expenses – A/C Debit - $ 27000

Allowance for Bad Debt – A/C Credit-- $ 27000

( Ageing report , Balance Sheet approach)

B . In other case , from Stockholders point of view – 1% of the years credit sales of $ 400,000 , So we need to account following entries

    Bad Debt Expenses – A/C Debit - $ 40000 ( 1% $400,000)

Allowance for Bad Debt – A/C Credit-- $ 40000

( above represents Income Statement approach)