Gregg company uses the allowance method for recording its expected credit losses. It estimates credit losses at 3% of credit sales, which were $900,000 during the year. On December 31 the accounts receivable balance was 150,000, and the allowance for doubtful accounts had a credit balance of 12,200 before adjustment. A. Prepare the adjusting entry to record the credit losses for the year. B. Show how accounts receivable and the allowance for doubtful accounts would appear in the December 31 balance sheet. The top 2 shaded blanks have the options of Bad debts expense, allowance for doubtful accounts. The bottom 2 shaded blanks have the options of accounts receivable, less: allowance for doubtful accounts.
Gregg company uses the allowance method for recording its expected credit losses. It estimates credit losses at 3% of credit sales, which were $900,000 during the year. On December 31 the accounts receivable balance was 150,000, and the allowance for doubtful accounts had a credit balance of 12,200 before adjustment. A. Prepare the adjusting entry to record the credit losses for the year. B. Show how accounts receivable and the allowance for doubtful accounts would appear in the December 31 balance sheet. The top 2 shaded blanks have the options of Bad debts expense, allowance for doubtful accounts. The bottom 2 shaded blanks have the options of accounts receivable, less: allowance for doubtful accounts.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
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.
Question
Gregg company uses the allowance method for recording its expected credit losses. It estimates credit losses at 3% of credit sales, which were $900,000 during the year. On December 31 the accounts receivable balance was 150,000, and the allowance for doubtful accounts had a credit balance of 12,200 before adjustment.
A. Prepare the adjusting entry to record the credit losses for the year.
B. Show how accounts receivable and the allowance for doubtful accounts would appear in the December 31 balance sheet . The top 2 shaded blanks have the options of Bad debts expense, allowance for doubtful accounts. The bottom 2 shaded blanks have the options of accounts receivable, less: allowance for doubtful accounts.
Transcribed Image Text:**Credit Losses Based on Credit Sales**
**Gregg Company** uses the allowance method for recording its expected credit losses. It estimates credit losses at three percent of credit sales, which were $900,000 during the year. On December 31, the Accounts Receivable balance was $150,000, and the Allowance for Doubtful Accounts had a credit balance of $12,200 before adjustment.
### Instructions:
**a. Prepare the adjusting entry to record the credit losses for the year**
**b. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear in the December 31 balance sheet.**
---
**a. Prepare the Adjusting Entry:**
**General Journal**
| Date | Description | Debit | Credit |
|----------|--------------------------------|--------|--------|
| Dec. 31 | Bad Debt Expense | $27,000| |
| | Allowance for Doubtful Accounts | | $27,000|
*To record allowance for credit losses.*
---
**b. Accounts Receivable and Allowance for Doubtful Accounts in the Balance Sheet:**
**Current Assets:**
- Accounts Receivable: $150,000
- Less: Allowance for Doubtful Accounts: $39,200
- **Net Accounts Receivable: $110,800**
*Note: Do not use negative signs with your answers.*
---
**Explanation of Calculation:**
1. **Credit Loss Estimation**:
- Estimated credit loss = 3% of $900,000 = $27,000
2. **Adjusted Balance for Allowance for Doubtful Accounts**:
- Existing balance before adjustment: $12,200
- New adjustment: $27,000
- Total adjusted balance = $12,200 + $27,000 = $39,200
3. **Net Accounts Receivable**:
- Accounts Receivable: $150,000
- Less: Allowance for Doubtful Accounts = $39,200
- Net Accounts Receivable = $150,000 - $39,200 = $110,800
This detailed entry ensures that the financial statements accurately reflect the expected credit losses for the period, and it complies with the accrual accounting principles.
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