Problem 7-1: At the beginning of 2016, EZ Tech Company’s Accounts Receivable balance with $140,000, and the balance in Allowance for Doubtful Accounts was $2,350 (Cr.). EZ Tech’s sales in 2016 were $1,050,000, 80% of which were on credit. Collections on account during the year were $670,000. The company wrote off $4,000 of uncollectible accounts during the year. Prepare summary journal entries related to the sale, collections, and write-offs of accounts receivable during 2016. Prepare journal entries to recognize bad debts assuming that (a) bad debts expense is 3% of credit sales and (b) amounts expected to be uncollectible are 6% of the year-end accounts receivable. What is the net realizable value of accounts receivable on December 31, 2016, under each assumption in part (2)? What effect does the recognition of bad debts expense have on the net realizable value? What effect does the write-off of accounts have on the net realizable value?
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 7-1: At the beginning of 2016, EZ Tech Company’s
- Prepare summary
journal entries related to the sale, collections, and write-offs of accounts receivable during 2016. - Prepare journal entries to recognize
bad debts assuming that (a) bad debts expense is 3% of credit sales and (b) amounts expected to be uncollectible are 6% of the year-end accounts receivable. - What is the net realizable value of accounts receivable on December 31, 2016, under each assumption in part (2)?
- What effect does the recognition of bad debts expense have on the net realizable value? What effect does the write-off of accounts have on the net realizable value?
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