Chapter 7, Problem 2BP

1.

To determine

Prepare the adjusting entry to recognize the bad debt expense under each of the independent assumptions.

Explanation of Solution

a.

Bad debt expense:

Bad debt expense is an expense account. The amounts of loss incurred from extending credit to the customers are recorded as bad debt expense. In other words, the estimated uncollectible accounts receivable are known as bad debt expense.

Allowance method:

It is a method for accounting bad debt expense, where uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for doubtful account.

Percentage-of-sales basis:

It is a method of estimating the bad debts (loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of net credit sale for a specific period. Estimated bad debts would be treated as a bad debt expense of the particular period.

Prepare the adjusting entry to record the bad debt expense.

Date	Particulars	Debit	Credit
December 31	Bad debt expense	$33,550
	Allowance for doubtful accounts		$33,550
	(To record the bad debt expense)

Table (1)

Working note:

Calculate the bad debt expense.

$\begin{array}{c}\text{Bad debt expense = }\left[\begin{array}{l}\text{Credit sales × Estimated percentage}\\ \text{of bad debt expense on credit sales}\end{array}\right]\\ =\left[\$1,342,000\times 2.5\%\text{ of credit sales}\right]\\ =\$33,550\end{array}$

Description:

Bad debt expenses are determined under percentage of credit sales basis, Hence, the estimated amount of bad debt expense would be treated as the bad debt expense of the year. Estimated bad debt expenses are $33,550, which has to be recorded by increasing both the bad debt expense account and allowance for doubtful accounts. Therefore,

• An increase in bad debt expense (decrease in stockholders’ equity account) is debited with $33,550 and
• An increase in allowance for doubtful accounts (contra asset account) is credited with $33,550.

b.

Prepare the adjusting entry to record the bad debt expense.

Date	Particulars	Debit	Credit
December 31	Bad debt expense	$35,505
	Allowance for doubtful accounts		$35,505
	(To record the bad debt expense)

Table (2)

Working note:

Calculate the bad debt expense.

$\begin{array}{c}\text{Bad debt expense = }\left[\begin{array}{l}\text{Total sales × Estimated percentage}\\ \text{of bad debt expense on total sales}\end{array}\right]\\ \text{=}\left[\begin{array}{l}\left(\text{Credit sales + Cash sales}\right)\\ \text{× 1}\text{.5\% of total sales}\end{array}\right]\\ =\left[\left(\$1,342,000+\$1,025,000\right)\times 1.5\%\right]\\ =\$35,505\end{array}$

Description:

Percentage-of-sales basis:

It is a method of estimating the bad debts (loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of total sale for a specific period. Estimated bad debts would be treated as a bad debt expense of the particular period.

Bad debt expenses are determined under percentage of total sales basis, Hence, the estimated amount of bad debt expense would be treated as the bad debt expense of the year. Estimated bad debt expenses are $35,505, which has to be recorded by increasing both the bad debt expense account and allowance for doubtful accounts. Therefore,

• An increase in bad debt expense (decrease in stockholders’ equity account) is debited with $35,505 and
• An increase in allowance for doubtful accounts (contra asset account) is credited with $35,505.

c.

Prepare the December 31 year-end adjusting entry for uncollectible.

Date	Particulars	Debit	Credit
December 31	Bad debt expense	$27,000
	Allowance for doubtful accounts		$27,000
	(To record the bad debt expense)

Table (3)

Working note:

Calculate the bad debt expense.

$\begin{array}{c}\text{Bad debt expense = }\left[\begin{array}{l}\text{Total estimated uncollectibles under}\\ \text{the percentage-of-receivables basis }-\text{ Credit}\\ \text{balance in allowance for doubtful accounts}\end{array}\right]\\ =\left[\left(\text{Accounts receivable}\times 6\text{\%}\right)-\$7,500\right]\\ =\left[\left(\$575,000\times 6\%\right)-\$7,500\right]\\ =\$34,500-\$7,500\end{array}$

$\text{Bad debt expense = \$27,000}$

Description:

Percentage-of-receivables basis:

It is a method of estimating the bad debts (loss on extending credit), by multiplying the expected percentage of uncollectible with the total amount of receivables for a specific period. Under this method, the estimated bad debts would be treated as a target allowance balance.

Normal balance of allowance for doubtful accounts (contra asset account) is credit balance. It is given that Company C’s unadjusted balance in Allowance for doubtful accounts is a credit of $7,500. Determined estimated uncollectible receivable is $34,500. Hence, to bring the allowance for doubtful account balance from a credit of $7,500 to credit of $34,500 bad debt expense must be increased by $80,085, and allowance for doubtful accounts must be increased by $27,000. Therefore,

• An increase in bad debt expense (decrease in stockholders’ equity account) is debited with $27,000 and
• An increase in allowance for doubtful accounts (contra asset account) is credited with $27,000.

2.

To determine

Show how accounts receivable and allowance for doubtful accounts appear on the balance sheet of Company C, considering the facts in 1a.

Explanation of Solution

Show how accounts receivable and allowance for doubtful accounts appear on the balance sheet of Company C, considering the facts in 1a.

Company C
Balance sheet (Partial)
Current assets:
Accounts receivable	$575,000
Less: Allowance for doubtful accounts	($41,050)	$533,950

Table (4)

Working note:

Determine the amount to be reported in the balance sheet as allowance for doubtful accounts.

Unadjusted allowance balance (Credit)	$7,500
Adjustment to the allowance account (credit)	$33,550
Adjusted balance	$41,050

Table (5)

3.

To determine

Show how accounts receivable and allowance for doubtful accounts appear on the balance sheet of Company C, considering the facts in 1c.

Explanation of Solution

Show how accounts receivable and allowance for doubtful accounts appear on the balance sheet of Company C, considering the facts in 1c.

Company C
Balance sheet (Partial)
Current assets:
Accounts receivable	$575,000
Less: Allowance for doubtful accounts	($34,500)	$540,500

Table (6)