Credit department of the Starlight Inc. estimates uncollectible accounts while analyzing various receivables. By the end of year 2017, credit manager collects following information relating to receivables and uncollectible accounts. Gross accounts receivable at the end of year as presented in balance sheet of company $520000. On the basis of past experience, company estimates that 2.5 percent of gross accounts receivable are uncollectible. During 2017, an amount of $1500 receivable from specific customer is expected to be written off as uncollectible. However, of these accounts written off, total receivables of $500 were subsequently collected. Required: a. Prepare all necessary journal entries and calculate amount of accounts receivable in the balance sheet of Starlight Inc. before and after write-off of uncollectible accounts as at December 31, 2017.
Bad Debts
At the end of the accounting period, a financial statement is prepared by every company, then at that time while preparing the financial statement, the company determines among its total receivable amount how much portion of receivables is collected by the company during that accounting period.
Accounts Receivable
The word “account receivable” means the payment is yet to be made for the work that is already done. Generally, each and every business sells its goods and services either in cash or in credit. So, when the goods are sold on credit account receivable arise which means the company is going to get the payment from its customer to whom the goods are sold on credit. Usually, the credit period may be for a very short period of time and in some rare cases it takes a year.
Credit department of the Starlight Inc. estimates uncollectible accounts while analyzing various receivables. By the end of year 2017, credit manager collects following information relating to receivables and uncollectible accounts.
Gross
Required:
a. Prepare all necessary
b. Further, Company comes to know that a customer whose receivables were due on December 1, 2017, could not pay due amount of $50000. Instead, the customer issues 3-months notes receivable along with 6 percent interest. Company records interest revenue receivable at December 31, 2017. However, the customer paid full amount along with interest on February 28, 2018 (after three months).
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Accounts receivables: Accounts receivables are the amount due from the customers who has used service or product of the company.
Estimated uncollectible accounts means the accounts which has no chance to be collected.
Percentage of percentage of receivable method takes the two factors in to consideration.
The gross amount of receivables and the estimated uncolletible percentages.
After multiplying these two factors, we get the ending balance of allowance for doubtful debts.
If company already had any balance in the allowance account, then this amount will also be considered while making the adjusting entry for bad debts.
Requirement 1 asks for the balance of accounts receivables balance before and after write off of uncollectible accounts.
Before providing the effect of uncollectible accounts, we need to work on the entry during 2017.
During year, a customer of $1,500 was written of f and subsequently $500 was received from the same customer.
So, journal entry on this will be,
| Date | Particulars | Post. Ref. | Debit | Credit |
| Allowance for uncollectible accounts Dr. | $1,500 | |||
| Accounts receivables Cr. | 1,500 | |||
| (being amount written of for expected uncollectible accounts) | ||||
| Accounts Receivables Dr. | 500 | |||
| Allowance for uncollectible expenses Cr. | 500 | |||
| Cash Dr. | 500 | |||
| Accounts receivables Cr. | 500 | |||
| (being 500 received from the already written off customer) | ||||
Now, Dec 31, uncollectible amounts can be calculated based on the percentage given.
Amount = 2.5% * $520,000
= $13,000
Now, this is the ending balance of allowance for uncollectible allowance.And we need to prepare adjusting entry for this. Allowance for uncollectible allowance has already a debit balance of $1,000 due to the previous entries we have made. Now, the present balance of uncollectible account is debit $1,000 and as per the the estimate, it neds to be $13,000 Credit. So, we need to make adjusting entry for $14,000.
| Date | Particulars | Post. Rf. | Debit | Credit |
| Dec. 31 2017 | Bad debt Exp. Dr. | $14,000 | ||
| Allowance for uncollectible accounts Cr. | 14,000 | |||
| (being adjusted for the uncollectible accounts) |
Amount of Accounts receivable in the books of S. Company.
Accounts receivable before write-off of uncollectible accounts will be as it is given $520,000
Accounts receivable after write-off of uncollectible accounts = $520,000- 14,000 = $506,000
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