| QUESTION:
Company XYZ uses the allowance method for its uncollectible accounts receivable. During the year, a monthly bad debt accrual is made by applying 2% times the amount of credit sales for the month. At the year end Dec 31st, an ageing of accounts receivable is prepared and the allowance for uncollectible accounts is adjusted accordingly. At end of 2004, accounts receivables were $1,500,000 and the allowance account had a credit balance of $160,000. Details of Accounts Receivable for the year is as follows: Beginning balance $1,500,000 Credit sales $4,200,000 Collections ($3,700,000) Write Offs ($90,000) Ending balance $1,910,000
The following is the Summary Ageing As At Dec 31st: Ageing bucket $ Estimate of % Uncollectible 0 – 60 days $1,512,000 5% 61 – 90 days $220,000 10% 91- 120 days $50,000 30% > 120 days $128,000 50% Total $1,910,000 Required: (a) Prepare a summary journal entry to record the monthly bad debt accrual and the write-offs during the year (b) Prepare the necessary year-end adjusting entry for bad debt expense. (c) What is the total bad debt expense for 2005. How would accounts receivable appear in the 2005 Balance Sheet? |
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ANSWER TO NO (A): To record monthly bad debt expenses accrual summary. Debit: Bad debt expense (2% x $4,200,000) $84,000 Credit: Allowance for uncollectible accounts $84,000 To record year 2005 accounts receivable write offs. Debit : Allowance for uncollectible accounts $90,000 Credit: Accounts receivable $90,000 ANSWER TO (B): Debit: Bad debt expense $22,600 Credit: Allowance for uncollectible accounts $22,600 Ageing $ Estimated Allowance 0 – 60 days $1,512,000 x 5% = $75,600 61 – 90 days $220,000 x 10% = $22,000 91- 120 days $50,000 x 30% = $15,000 > 120 days $128,000 x 50% = $64,000 Total $1,910,000 $176,600
Computation of Increase/decrease in Allowance for uncollectible account: Allowance for uncollectible account: Opening Balance $160,000 + Monthly bad debts accruals $84,000 - Write offs ($90,000) Balance before year end adjustment $154,000 Required Allowance ( per above) $176,600 Increase in Allowance $22,600
ANSWER TO QUESTION ( C) Computation of total Bad debt expense for 2005 Monthly accruals $84,000 Year end adjustment 22,600 Total $106,600
Balance Sheet As At Dec 31 st 2005 Current assets: Accounts receivable, net of $176,600 in Allowance for uncollectible accounts $1,733,400
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