Chapter 7, Problem 7.4P

Uncollectible accounts

• LO7–5, LO7–6

Raintree Cosmetic Company sells its products to customers on a credit basis. An adjusting entry for bad debt expense is recorded only at December 31, the company’s fiscal year-end. The 2017 balance sheet disclosed the following:

Current assets:

Receivables, net of allowance for uncollectible accounts of $30,000 $432,000

During 2018, credit sales were $1,750,000, cash collections from customers $1,830,000, and $35,000 in accounts receivable were written off. In addition, $3,000 was collected from a customer whose account was written off in 2017. An aging of accounts receivable at December 31, 2018, reveals the following:

Age Group	Percentage of Year-End Receivables in Group	Percent Uncollectible
0–60 days	65%	4%
61–90 days	20	15
91–120 days	10	25
Over 120 days	5	40

Required:

1. 1. Prepare summary journal entries to account for the 2018 write-offs and the collection of the receivable previously written off.
2. 2. Prepare the year-end adjusting entry for bad debts according to each of the following situations:
   1. a. Bad debt expense is estimated to be 3% of credit sales for the year.
   2. b. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable.
   3. c. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is determined by an aging of accounts receivable.
3. 3. For situations (a)–(c) in requirement 2 above, what would be the net amount of accounts receivable reported in the 2018 balance sheet?

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 2018 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)

To determine

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

Explanation of Solution

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:

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

To determine

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

Explanation of Solution

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)

To determine

Entry Bad Debts Expense – Aging of Accounts Receivable

Explanation of Solution

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-18
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)

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)

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