Chapter 7, Problem 7.4P

(1)

To determine

Aging of receivables method:

A method of determining the estimated uncollectible receivables, based on the age of individual accounts receivable is known as aging of receivables method.

To prepare: A summary journal entries to account for the 2016 Write-offs and the collection of account receivables previously written off:

Explanation of Solution

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
	Allowance for uncollectible accounts		35,000
	Accounts Receivable			35,000
	(To record the write-off of receivables)

Table (1)

 The collection of account receivables previously written-off:

	Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
		Accounts Receivable		3,000
		Allowance for uncollectible accounts			3,000
		(To record the reinstate the debt previously written off as bad)
		Cash		3,000
		Accounts Receivable			3,000
		(To record the receipt of cash from the debt previously written off as bad)

Table (2)

(2)

To determine

To prepare: The year-end adjusting entry for bad debts according to each of the following situation:

Explanation of Solution

(a)

Bad Debts Expense – Percent of Credit Sales:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
	Bad Debts Expense		52,500
	Allowance for uncollectible accounts			52,500
	(To record  bad debts expense)

Table (3)

Working note:

Compute the amount of monthly bad debts expense:

$\begin{array}{c}\text{Bad Debts Expense = 3\% of Credit Sales}\\ \text{= \$1,750,000 }\times \text{ 3\%}\\ \text{= \$52,500}\end{array}$

(b)

Bad Debts Expense – Percent of Year Balance of Accounts Receivable:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
	Bad Debts Expense		36,700
	Allowance for uncollectible accounts			36,700
	(To record  bad debts expense)

Table (4)

• Compute the year-end balance of accounts receivable:

Accounts Receivable Accounts Analysis
Beginning balance including allowance $\left[\$432,000+\$30,000\right]$	$462,000
Add: Credit Sales	1,750,000
Less: Write-offs	(35,000)
Less: Cash Collection	(1,830,000)
Ending balance	$347,000

Table (5)

Working note:

Compute the amount of monthly bad debts expense:

$\begin{array}{c}\text{Bad Debts Expense = 10\% of Year-end balance of accounts receivable}\\ \text{= \$347,000 }\times \text{ 10\%}\\ \text{= \$34,700}\end{array}$

Compute the bad debts expense:

Allowance for Uncollectible Accounts Analysis
Details	Amount ($)
Beginning Balance	$30,000
Add: Collections of receivable previously written off as bad	3,000
Less: Write-offs	(35,000)
Balance before year-end Adjustments	(2,000)
Less: Estimated Allowance	(34,700)
Bad Debts Expense after Adjustments	$36,700

Table (6)

(c)

Entry Bad Debts Expense – Aging of Accounts Receivable

• Compute the estimated or targeted balance of Allowance for Uncollectible Accounts:

Estimated or targeted balance of Allowance for Uncollectible Accounts is determined by multiplying the estimated percentage of uncollectible with the estimated amount in each category.

R Company
Estimated Uncollected Accounts
31-Dec-16
Details	Year End Accounts Receivable	Percentage of Uncollectible Accounts of Year End Accounts Receivable	Total Amount	Percentage Considered Uncollectible	Allowance for Doubtful Debts  Accounts
	($)	($)	($)	(%)	($)
					[B × C]
A	B	C	D	E	F
0-60 Days Past Due	$347,000	65%	225,550	4%	9,022
61-90 Days Past Due	347,000	20%	69,400	15%	10,410
91-120 days Past Due	347,000	10%	34,700	25%	8,675
Over 120 Days Past	347,000	5%	17,350	40%	6,940
Total			347,000		35,047

Table (7)

• Compute the bad debts expense:

Allowance for Uncollectible Accounts Analysis
Details	Amount ($)
Beginning Balance	$30,000
Add: Collections of receivable previously written off as bad	3,000
Less: Write-offs	(35,000)
Balance before year-end Adjustments	(2,000)
Less: Estimated Allowance	(35,047)
Bad Debts Expense after Adjustments	$37,047

Table (8)

• Record the Entry:

Date	Account Title and Explanation	Post Ref	Debit ($)	Credit ($)
	Bad Debts Expense		37,047
	Allowance for uncollectible accounts			37,047
	(To record  bad debts expense)

Table (9)

(3)

To determine

The net amount of accounts receivable reported in the 2018 balance sheet.

Explanation of Solution

The net amount of accounts receivable reported in the 2018 balance sheet is determined as follows:

	Amount ($)	Amount ($)	Amount ($)
Assets:	(a)	(b)	(c)
Current assets:
Accounts receivable	347,000	347,000	347,000
Less: Allowance for bad debts (a)	(50,500)	(34,700)	(35,047)
	296,500	312,300	311,953

Table (10)

Working note:

Calculate year end allowance for situation (a)

$\begin{array}{c}\text{Year End Allowance = Estimated Allowance }-\text{ Debit Balance}\\ \text{=}\text{\$52,500}-\text{\$2,000}\\ \text{=}\text{\$50,500}\end{array}$