From inception of operation in 2017, Danica Company carried no allowance for doubtful accounts. Uncollectible receivables were expensed as written off and recoveries were credited to income as collected. On March 1, 2021, after the 2020 financial statements were issued, management recognized that Danica’s accounting policy with respect to doubtful accounts was not correct and determined that an allowance for doubtful accounts was necessary. A policy was established to maintain an allowance for doubtful accounts based on Danica’s historical bad debt loss percentage applied to year end accounts receivable. The historical bad debt loss percentage is to be recomputed each year based on the relationship of net write offs to credit sales for all available past years up to a maximum of five years. Information from Danica’s records for five years is as follows: Year Credit sales Accounts written off Recoveries 2017 P 750,000 P 7,500 Nil 2018 1,100,000 20,000 P 1,000 2019 1,500,000 25,000 1,500 2020 1,650,000 32,500 2,500 2021 2,000,000 44,000 5,000 Accounts receivable balances were P625,000 and P1,000,000 at December 31, 2020 and December 31, 2021, respectively. What is the doubtful accounts expense for the year 2021? What is the net realizable value of the accounts receivable on December 31, 2021?
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.
Problem 23
From inception of operation in 2017, Danica Company carried no allowance for doubtful accounts. Uncollectible receivables were expensed as written off and recoveries were credited to income as collected. On March 1, 2021, after the 2020 financial statements were issued, management recognized that Danica’s accounting policy with respect to doubtful accounts was not correct and determined that an allowance for doubtful accounts was necessary. A policy was established to maintain an allowance for doubtful accounts based on Danica’s historical
Year Credit sales
Accounts
written off Recoveries
2017 P 750,000 P 7,500 Nil
2018 1,100,000 20,000 P 1,000
2019 1,500,000 25,000 1,500
2020 1,650,000 32,500 2,500
2021 2,000,000 44,000 5,000
Accounts receivable balances were P625,000 and P1,000,000 at December 31, 2020 and December 31, 2021, respectively.
- What is the doubtful accounts expense for the year 2021?
- What is the net realizable value of the accounts receivable on December 31, 2021?
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