Question

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 2020balance sheet disclosed the following:

Current assets:
Receivables, net of allowance for uncollectible accounts of $47,000	$	517,000

During 2021, credit sales were $1,835,000, cash collections from customers $1,915,000, and $56,000 in accounts receivable were written off. In addition, $4,700 was collected from a customer whose account was written off in 2020. An aging of accounts receivable at December 31, 2021, reveals the following:

	Percentage of Year-End		Percent
Age Group	Receivables in Group		Uncollectible
0−60 days	65	%	4	%
61−90 days	15		10
91−120 days	15		30
Over 120 days	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?

Answer 1

	Particulars	Debit	Credit
1	Write off entry for the uncollectible amount of $56,000
	Allowance for doubtful account	56000
	Accounts receivable		56000
	(Being entry for write off uncollectible amount of $56000)
	Subsequently collects $4700 from earlier written off in 2020
	Accounts receivable	4700
	Allowance for doubtful account		4700
	(Being entry for reinstate the amount of $4,700 collected subsequently)
	Cash	4700
	Accounts receivable		4700
	(Being entry for receipts of $4700 collected subsequently)
2
a	Bad debt expense is estimated to be 3% of credit sales for the year.
	Bed debts expense	55,050
	Allowance for doubtful account		8,600
	(Being entry for provision for bad debts of YE 2021 $55,050 (i.e 3% of 1,835,000).
b	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
	Bed debts expense	40,800
	Allowance for doubtful account		40,800
	(Being entry for provision for bad debts of YE 2021 $40,800).
c	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.
	Bed debts expense	45,288
	Allowance for doubtful account		45,288
	(Being entry for provision for bad debts of YE 2021 $40,800).
3	Net amount of accounts receivable in situation (a) - (ç) are as follows in the 2020-21 balance sheet
	a - Receivable, net of allowances	3,52,950
	b - Receivable, net of allowances	3,67,200
	c - Receivable, net of allowances	3,62,712