Chapter 7, Problem 7.1P

Allowance Method for Accounting for Bad Debts

At the beginning of 2016, EZ Tech Company’s Accounts Receivable balance was $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.

Required

1. Prepare summary journal entries related to the sale, collections, and write-offs of accounts receivable during 2016.
2. 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.
3. What is the net realizable value of accounts receivable on December 31, 2016, under each assumption in part (2)?
4. 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?