Problem 5-7 (AICPA Adapted)From inception of operations, Savvy Company carried noallowance for doubtful accounts.Uncollectible receivables were expensed as written off andrecoveries were credited to income as collected.During the current year, management recognized that theaccounting policy with respect to doubtful accounts was notcorrect, and determined that an allowance for doubtful accountswas necessary.A policy was established to maintain an allowance for doubtfulaccounts based on historical bad debt loss percentage appliedto year-end accounts receivable.The historical bad debt loss percentage is to be recomputedeach year based on all available past years up to a maximum offive years.Accountswritten offYearCredit salesRecoveries1,500,0002,200,0003,000,0003,300,0004,000,000201615,00040,00050,00065,00088,00020172,0003,0005,00010,000201820192020Accounts receivable balances were P1,250,000 and P2,000,000on January 1, 2020 and December 31, 2020, respectively.Required:1. Prepare journal entry to set up the allowance for doubtfulaccounts on January 1, 2020.2. Compute the doubtful accounts expense for the current year,3. Determine the net realizable value of accounts receivableon December 31, 2020.AV149

Bad debts: Bad debts are defined as the expenses that are occurred when the accounts receivables are…

Required: 1. Prepare journal entry to set up the allowance for doubtful accounts on January 1, 2020. 2. Compute the doubtful accounts expense for the current year, 3. Determine the net realizable value of accounts receivable on December 31, 2020.

Required: 1. Prepare journal entry to set up the allowance for doubtful accounts on January 1, 2020. 2. Compute the doubtful accounts expense for the current year, 3. Determine the net realizable value of accounts receivable on December 31, 2020.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Problem 5-7 (AICPA Adapted)
From inception of operations, Savvy Company carried no
allowance for doubtful accounts.
Uncollectible receivables were expensed as written off and
recoveries were credited to income as collected.
During the current year, management recognized that the
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 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 all available past years up to a maximum of
five years.
Accounts
written off
Year
Credit sales
Recoveries
1,500,000
2,200,000
3,000,000
3,300,000
4,000,000
2016
15,000
40,000
50,000
65,000
88,000
2017
2,000
3,000
5,000
10,000
2018
2019
2020
Accounts receivable balances were P1,250,000 and P2,000,000
on January 1, 2020 and December 31, 2020, respectively.
Required:
1. Prepare journal entry to set up the allowance for doubtful
accounts on January 1, 2020.
2. Compute the doubtful accounts expense for the current year,
3. Determine the net realizable value of accounts receivable
on December 31, 2020.
AV
149

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