Chapter 8, Problem 8.3AP

(a)

To determine

Accounts receivable

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods, and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

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.

Aging of receivables:

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

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.

Direct write-off method:

This method does not make allowance or estimation for uncollectible accounts, instead this method directly write-off the actual uncollectible accounts by debiting bad debt expense and by crediting accounts receivable. Under this method, accounts would be written off only when the receivables from a customer remain uncollectible.

Write-off:

Write-off refers to deduction of a certain amount from accounts receivable, when it becomes uncollectible.

To Journalize and post: The adjusting entry for recording the bad debt expenses at December 31, 2016.

Answer to Problem 8.3AP

Journalize the adjusting entry to record the bad debt expenses at December 31, 2016.

Date	Particulars	Debit	Credit
December 31, 2016	Bad debt expense	$34,400
	Allowance for doubtful accounts		$34,400
	(To adjust the bad debt expense)

Table (1)

Post the adjusting entry.

Allowance for doubtful accounts:

Allowance for doubtful accounts
Date	Particulars	Debit	Date	Particulars	Credit
2016			December 31, 2016	Balance (Unadjusted)	$8,000
			December 31, 2016	Bad debts (Adjusting) (Balancing figure)	$34,400
	Total	$0		Total	$42,400
				Ending balance	$42,400

Table (2)

Bad debt expense:

Bad debt expense
Date	Particulars	Debit	Date	Particulars	Credit
December 31, 2016	Allowance for doubtful accounts (Adjusting) (Balancing figure)	$34,400
	Total	$34,400		Total	$0
	Ending balance	$34,400

Table (3)

Working note:

The aging of accounts receivable indicates that the total estimated bad debts of the year 2016 are $42,400.

Calculate the amount of bad debt expense to be recorded in adjusting entry.

$\begin{array}{c}\begin{array}{l}\text{Bad debt expense to be}\\ \text{recorded in adjusting entry}\end{array}\}\text{= }\left[\begin{array}{l}\text{Total estimated bad debts}-\text{Unadjusted credit}\\ \text{balance in allowance for doubtful accounts}\end{array}\right]\\ \text{=}\left[\text{\$42,400}-\$8,000\right]\\ =\$34,400\end{array}$

Alternative method to calculate the amount of bad debt expense to be recorded in adjusting entry using T-account of Allowance for doubtful accounts is as follows.

Allowance for doubtful accounts:

Allowance for doubtful accounts
Date	Particulars	Debit	Date	Particulars	Credit
2016			December 31, 2016	Balance (Unadjusted)	$8,000
			December 31, 2016	Bad debts (Adjusting) (Balancing figure)	$34,400
	Total	$0		Total	$42,400
				Ending balance	$42,400

Table (4)

Explanation of Solution

Allowance for doubtful accounts (contra asset account) normal balance is credit balance. It is given that company’s estimated bad debts of the year as per aging of accounts receivable is $42,400. Hence, to bring the allowance for doubtful account balance from $8,000 to $42,400, it is required to increase bad debt expense and allowance for doubtful accounts by $34,400.

Hence, an increase in bad debt expense (decrease in stockholders’ equity account) is debited with $34,400 and an increase in allowance for doubtful accounts (contra asset account) is credited with $34,400.

(b)

To determine

To Journalize and post: The transactions and events made in 2017.

Answer to Problem 8.3AP

(1) Journalize the write-off of uncollectible.

Date	Account Title and Explanation	Debit ($)	Credit ($)
March 1	Allowance for Doubtful Accounts	600
	Accounts Receivable		600
	(To record write-off the uncollectible accounts receivable)

Table (5)

(2) Journalize the collection of $600 from a customer on May 1, whose account is written off on March 1, 2017.

Date	Account Title and Explanation	Debit ($)	Credit ($)
May 1	Accounts Receivable	600
	Allowance for Doubtful Accounts		600
	(The reverse entry of write-off)
May 1	Cash	600
	Accounts Receivable		600
	(To record collection of cash on account)

Table (6)

Post the adjusting entry to the Allowance for doubtful accounts:

Allowance for doubtful accounts
Date	Particulars	Debit	Date	Particulars	Credit
2016			December 31, 2016	Balance (Unadjusted)	$8,000
			December 31, 2016	Bad debts (Adjusting) (Balancing figure)	$34,400
	Total	$0		Total	$42,400
			December 31, 2016	Balance (After adjustment)	$42,400
March 1, 2017	Accounts receivable	$600	May 1,           2017	Accounts receivable	600

Table (7)

Explanation of Solution

1. Company B judged $600 amount due from a customer is uncollectible. To record this write-off of uncollectible receivables, both allowance for doubtful accounts and accounts receivable must be decreased by $600. Hence, a decrease in Allowance for doubtful accounts (contra asset account) is debited with $600, and a decrease in accounts receivable (asset account) is credited with $600.

2. Company B recovered $600 from a customer, whose account is previously written off as uncollectible. Hence, Company B is required to reverse the entry, which is previously written off as uncollectible receivables. Hence, accounts receivable is debited to increase its balance by $600, and allowance for doubtful accounts is credited to increase its balance by $600.

Now, the collection of cash on account, increases cash and decreases accounts receivable by $600. Hence, an increase in cash (asset account) is debited and a decrease in accounts receivable (asset account) is credited with $600.

Allowance for doubtful accounts: Normal balance of an Allowance for doubtful accounts (contra asset account) is credit balance, therefore debit decreases Allowance for doubtful accounts balance and a credit increases Allowance for doubtful accounts balance.

(c)

To determine

To Journalize: The adjusting entry for recording the bad debt expenses at December 31, 2017.

Answer to Problem 8.3AP

Journalize the adjusting entry to record the bad debt expenses at December 31, 2017.

Date	Particulars	Debit	Credit
December 31, 2017	Bad debt expense	$38,100
	Allowance for doubtful accounts		$38,100
	(To adjust the bad debt expense)

Table (8)

Working note:

The aging of accounts receivable schedule indicates that the total estimated bad debts of the year 2017 are $36,700.

Calculate the amount of bad debt expense to be recorded in adjusting entry.

$\begin{array}{c}\begin{array}{l}\text{Bad debt expense to be}\\ \text{recorded in adjusting entry}\end{array}\}\text{= }\left[\begin{array}{l}\text{Total estimated bad debts}+\text{Unadjusted debit}\\ \text{balance in allowance for doubtful accounts}\end{array}\right]\\ \text{=}\left[\text{\$36,700}+\$1,400\right]\\ =\$38,100\end{array}$

Alternative method to calculate the amount of bad debt expense to be recorded in adjusting entry using T-account of Allowance for doubtful accounts is as follows.

Allowance for doubtful accounts:

Allowance for doubtful accounts
Date	Particulars	Debit	Date	Particulars	Credit
December 31, 2017	Balance (Unadjusted)	$1,400	December 31, 2017	Bad debts (Adjusting) (Balancing figure)	$38,100
	Total	$1,400		Total	$38,100
				Ending balance	$36,700

Table (9)

Explanation of Solution

Allowance for doubtful accounts (contra asset account) normal balance is credit balance. Company’s unadjusted balance in allowance for doubtful accounts is a debit of $1,400. It is given that company’s estimated bad debts of the year as per aging of accounts receivable is $36,700. Hence, to bring the allowance for doubtful account balance from debit balance of $1,400 to credit balance of $36,700, it is required to increase bad debt expense and allowance for doubtful accounts by $38,100.

Hence, an increase in bad debt expense (decrease in stockholders’ equity account) is debited with $38,100 and an increase in allowance for doubtful accounts (contra asset account) is credited with $38,100