Chapter 9, Problem 9.1APR

Entries related to uncollectible accounts

The following transactions were completed by The Irvine Company during the current fiscal year ended December 31:

Feb. 8. Received 40% of the $18,000 balance owed by DeCoy Co., a bankrupt business, and wrote off the remainder as uncollectible.

May 27. Reinstated the account of Seth Nelsen, which had been written off in the preceding year as uncollectible. Journalized the receipt of $7,350 cash in full payment of Seth’s account.

Aug. 13. Wrote off the $6,400 balance owed by Kat Tracks Co., which has no assets.

Oct. 31. Reinstated the account of Crawford Co., which had been written off in the preceding year as uncollectible. Journalized the receipt of $3,880 cash in full payment of the account.

Dec. 31. Wrote off the following accounts as uncollectible (compound entry): Newbauer Co., $7,190; Bonneville Co., $5,500; Crow Distributors, $9,400; Fiber Optics, $1,110.

31. Based on an analysis of the $1,785,000 of accounts receivable, it was estimated that $35,700 will be uncollectible. Journalized the adjusting entry.

Instructions

1. Record the January 1 credit balance of $26,000 in a T account for Allowance for Doubtful Accounts.

2. Journalize the transactions. Post each entry that affects the following selected T accounts and determine the new balances:

Allowance for Doubtful Accounts

Bad Debt Expense

3. Determine the expected net realizable value of the accounts receivable as of December 31.

4. Assuming that instead of basing the provision for uncollectible accounts on an analysis of receivables, the adjusting entry on December 31 had been based on an estimated expense of ¼ of 1% of the sales of $18,200,000 for the year, determine the following:

a. Bad debt expense for the year.

b. Balance in the allowance account after the adjustment of December 31.

c. Expected net realizable value of the accounts receivable as of December 31.

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.

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.

Allowance method:

It is a method for accounting bad debt expense, where amount of 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.

Two methods to estimate uncollectible accounts under allowance method are:

• Percentage of sales method, and
• Analysis of receivables method.

Percentage of sales method:

Credit sales are recorded by debiting (increasing) accounts receivable account. The bad debts is a loss incurred out of credit sales, hence uncollectible accounts can be estimated as a percentage of credit sales or total sales.

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

To record: January 1 credit balance of Allowance for doubtful accounts in a T-account.

Explanation of Solution

Prepare T-account for allowance for doubtful accounts to record its credit balance for January 1^st.

Allowance for doubtful accounts
Date	Particulars	Debit	Date	Particulars	Credit
			January 1	Balance	$26,000

Table (1)

To determine

To Journalize and post: The transactions of Company I.

Explanation of Solution

Journalize the transactions of Company I.

Date	Particulars	Debit	Credit
February 8	Cash	$7,200
	Allowance for doubtful accounts	$10,800
	Account receivable – Company DC		$18,000
	(To record the cash collection and write-off of remaining uncollectible account receivable )
May 27	Accounts receivable – Person SN	$7,350
	Allowance for doubtful accounts		$7,350
	(The reinstate the account of Person SN)
May 27	Cash	$7,350
	Accounts receivable – Person SN		$7,350
	(To record collection of cash on account)
August 13	Allowance for doubtful accounts	$6,400
	Account receivable – Person KT		$6,400
	(To record the write-off of uncollectible account receivable )
October 31	Accounts receivable – Company C	$3,880
	Allowance for doubtful accounts		$3,880
	(The reinstate the account of Company C)
November 7	Cash	$3,880
	Accounts receivable – Company C		$3,880
	(To record collection of cash on account)
December 31	Allowance for doubtful accounts	$23,200
	Account receivable – Company N		$7,190
	Account receivable – Company B		$5,500
	Account receivable – c Distributors		$9,400
	Account receivable – F Optics		$1,110
	(To record the write-off of uncollectible account receivable )
December 31	Bad debt expense (1)	$38,870
	Allowance for doubtful accounts		$38,870
	(To adjust the allowance for doubtful accounts)

Table (2)

Post the transactions in allowance for doubtful accounts and in bad debt expense account.

Allowance for doubtful accounts
Date	Particulars	Debit	Date	Particulars	Credit
February 8	Accounts receivable	$10,800	January 1	Balance	$26,000
August 13	Accounts receivable	$6,400	May 27	Accounts receivable	$7,350
December 31	Accounts receivable	$23,200	October 31	Accounts receivable	$3,880
			December 31	Bad debt expense (Adjusting entry) (Balancing figure)  (1)	$38,870
	Total	$40,400		Total	$76,100
			December 31	Ending balance	$35,700

Table (3)

Bad debt expense account
Date	Particulars	Debit	Date	Particulars	Credit
December 31	Allowance for doubtful accounts (Adjusting entry)	$38,870

Table (4)

For February 8:

Company I receives $7,200 $\left(40\%\times \$18,000\right)$ cash from Company DC on account.

To record the collection of cash on account, cash account must be increased and accounts receivable must be decreased by $7,200.

To record this write-off of remaining uncollectible receivables of $10,800 $\left(\$18,000-\$7,200\right)$ under allowance method, both allowance for doubtful accounts and accounts receivable must be decreased by $10,800. Hence,

• An increase in cash (asset account) is debited with $7,200,
• A decrease in Allowance for doubtful accounts (contra-asset accounts) is debited with $10,800, and
• A decrease in accounts receivable (asset account) is credited with $\left(\$7,200+\$10,800\right)$ $18,000.

For May 27:

On May 27, Company I has recovered $7,350 from Person SN in full, whose account is previously written off as uncollectible. Hence, company should reverse the entry, which is previously written off as uncollectible receivables. Hence,

• Accounts receivable (asset account) is debited to increase its balance by $7,350, and

• Allowance for doubtful accounts (contra-asset account) is credited to increase its balance by $7,350.

Now, the collection of cash on account, increases cash and decreases accounts receivable by $7,350, as company has collected its receivables. Hence,

• An increase in cash (asset account) is debited with $7,350, and

• A decrease in accounts receivable (asset account) is credited with $7,350.

For August 13:

To record this write-off of uncollectible receivables under allowance method, both allowance for doubtful accounts and accounts receivable must be decreased by $6,400. Hence,

• A decrease in Allowance for doubtful accounts (contra-asset accounts) is debited with $6,400.
• A decrease in accounts receivable (asset account) is credited with $6,400.

For October 31:

On October 31, Company I has recovered $3,880 from Company C in full, whose account is previously written off as uncollectible. Hence, company should reverse the entry, which is previously written off as uncollectible receivables. Hence,

• Accounts receivable (asset account) is debited to increase its balance by $3,880, and

• Allowance for doubtful accounts (contra-asset account) is credited to increase its balance by $3,880.

Now, the collection of cash on account, increases cash and decreases accounts receivable by $3,880, as company has collected its receivables. Hence,

• An increase in cash (asset account) is debited with $3,880, and

• A decrease in accounts receivable (asset account) is credited with $3,880.

For December 31:

To record this write-off of uncollectible receivables under allowance method, both allowance for doubtful accounts and accounts receivable must be decreased.

• A decrease in Allowance for doubtful accounts (contra-asset accounts) is debited and,
• A decrease in accounts receivable (asset account) is credited.

Adjusting entry is required at the end of the year, under allowance method. Hence, an estimated uncollectible account is treated as ending balance of allowance for doubtful accounts. Bad debt expense of $38,870 (1) is determined by preparing T account. Therefore, bad debt expense is debited to increase its balance, and allowance for doubtful accounts is credited to increase its balance.

To determine

The expected net realizable value of the accounts receivable as of December 31.

Explanation of Solution

Determine the expected net realizable value of the accounts receivable as of December 31.

$\begin{array}{c}\text{Net realizable value = Accounts receivable }-\text{ Allowance for doubtful accounts}\\ \text{=\$1,785,000}-\$35,700\\ =\$1,749,300\end{array}$

Hence, the expected net realizable value of the accounts receivable as of December 31 is $1,749,300.

To determine

The amount of bad debt expense for the year.

Explanation of Solution

Given:

Sales: $18,200,000, estimated uncollectible in percentage: 1/4$\times$ 1% of sales.

Determine the amount of bad debt expense for the year.

$\begin{array}{c}\text{Bad debt expense for the year=}\left[\begin{array}{l}\text{Sales }\times \text{Estimated expense}\\ \text{in percentage of sales}\end{array}\right]\\ \text{=\$18,200,000}\times \left(\frac{1}{4}\times 1\%\text{ of sales}\right)\\ =\$45,500\end{array}$ (2)

Hence, the amount of bad debt expense for the year is $45,500.

To determine

The balance in the allowance for doubtful account after the adjustment of December 31.

Explanation of Solution

Determine the balance in the allowance for doubtful account after the adjustment of December 31.

Allowance for doubtful accounts
Date	Particulars	Debit	Date	Particulars	Credit
January 29	Accounts receivable	$5,850	January 1	Balance	$54,200
August 9	Accounts receivable	$11,850	April 18	Accounts receivable	$4,000
December 31	Accounts receivable	$52,160	November 7	Accounts receivable	$7,000
			December 31	Bad debt expense (Adjusting entry) (Balancing figure) (2)	$66,000
	Total	$69,860		Total	$131,200
			December 31	Ending balance	$45,500

Table (5)

Allowance for doubtful accounts
Date	Particulars	Debit	Date	Particulars	Credit
February 8	Accounts receivable	$10,800	January 1	Balance	$26,000
August 13	Accounts receivable	$6,400	May 27	Accounts receivable	$7,350
December 31	Accounts receivable	$23,200	October 31	Accounts receivable	$3,880
			December 31	Bad debt expense (Adjusting entry) (1)	$45,500
	Total	$40,400		Total	$85,900
			December 31	Ending balance (Balancing figure)	$42,330

Hence, the balance in the allowance for doubtful account after the adjustment of December 31 is $42,330.

To determine

The expected net realizable value of accounts receivable as of December 31.

Explanation of Solution

Determine the expected net realizable value of accounts receivable as of December 31.

$\begin{array}{c}\text{Net realizable value = Accounts receivable }-\text{ Allowance for doubtful accounts}\\ \text{=\$1,785,000}-\$42,330\\ =\$1,742,670\end{array}$

Hence, the expected net realizable value of the accounts receivable as of December 31 is $1,742,670.