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Chapter 7: Question 5 (page 363)

Wilton, Inc. had net sales in 2017 of \(1,400,000. At December 31, 2017, before adjusting entries, the balances in selected accounts were Accounts Receivable \)250,000 debit, and Allowance for Doubtful Accounts $2,400 credit. If Wilton estimates that 8% of its receivables will prove to be uncollectible, prepare the December 31, 2017, journal entry to record bad debt expense.

Short Answer

Expert verified

Bad debt expenses equal $17,600 because $2,400 is adjusted against the credit balance of allowance for doubtful accounts.

Step by step solution

01

Definition of Net Sales

Net sales can be defined as the figure calculated from gross sales after adjusting for all discounts and returns.

02

Journal entry to record the bad debt expenses

Date

Accounts and explanation

Debit $

Credit $

31 Dec 2017

Bad Debt expenses

$17,600

Allowance for doubtful accounts

$17,600

Working notes:

Allowancefordoubtfulaccounts=Accountreceivables脳Estimatedbeddebtpercentage-Creditbalanceforallowancefordoubtfulaccounts=$250,000脳8%-2400=$17,600

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Most popular questions from this chapter

(Bad-Debt Reporting) The chief accountant for Dickinson Corporation provides you with the following list of accounts receivable written off in the current year.

Date

Customer

Amount \(

March 31

E.L Masters Company

\)7,800

June 30

Stephen Crane Associates

6,700

September 30

Amy Lowell鈥檚 Dress Shop

7,000

December 31

R. Frost. Inc

9,830

Dickinson follows the policy of debiting Bad Debt Expense as accounts are written off. The chief accountant maintains that this procedure is appropriate for financial statement purposes because the Internal Revenue Service will not accept other methods for recognizing bad debts.

All of Dickinson鈥檚 sales are on a 30-day credit basis. Sales for the current year total \(2,200,000. The balance in Accounts Receivable at year-end is \)77,000 and an analysis of customer risk and charge-off experience indicates that 12% of receivables will be uncollectible (assume a zero balance in the allowance).

Instructions

(a) Do you agree or disagree with Dickinson鈥檚 policy concerning recognition of bad debt expense? Why or why not?

(b) By what amount would net income differ if bad debt expense was computed using the percentage-of-receivables approach?

Presented below are a number of independent situations.

Instructions

For each individual situation, determine the amount that should be reported as cash. If the item(s) is not reported as cash, explain the rationale.

1. Checking account balance \(925,000; certificate of deposit \)1,400,000; cash advance to subsidiary of \(980,000; utility deposit paid to gas company \)180.

2. Checking account balance \(600,000; an overdraft in special checking account at same bank as normal checking account of \)17,000; cash held in a bond sinking fund \(200,000; petty cash fund \)300; coins and currency on hand \(1,350.

3. Checking account balance \)590,000; postdated check from customer \(11,000; cash restricted due to maintaining compensating balance requirement of \)100,000; certified check from customer \(9,800; postage stamps on hand \)620.

4. Checking account balance at bank \(37,000; money market balance at mutual fund (has checking privileges) \)48,000; NSF check received from customer \(800.

5. Checking account balance \)700,000; cash restricted for future plant expansion \(500,000; short-term Treasury bills \)180,000; cash advance received from customer \(900 (not included in checking account balance); cash advance of \)7,000 to company executive, payable on demand; refundable deposit of $26,000 paid to federal government to guarantee performance on construction contract.

(Bad-Debt Reporting) Presented below is information related to the Accounts Receivable accounts of Gulistan Inc. during the current year 2017.

1. An aging schedule of the accounts receivable as of December 31, 2017, is as follows.

Age

Net Debit Balance

% to be applied after correction is made

Under 60-days

\(172,342

1%

60-90 days

136,490

3%

91-120 days

39,924

6%

Over 120 days

23,644

\)3,700 definitely uncollectible; estimated remainder uncollectible is 25%

\(372,400

*The \)3,240 write-off of receivables is related to the 91-to-120 day category.

2. The Accounts Receivable control account has a debit balance of \(372,400 on December 31, 2017.

3. Two entries were made in the Bad Debt Expense account during the year: (1) a debit on December 31 for the amount credited to Allowance for Doubtful Accounts, and (2) a credit for \)3,240 on November 3, 2017, and a debit to Allowance for Doubtful Accounts because of a bankruptcy.

4. Allowance for Doubtful Accounts is as follows for 2017.

Allowance for Doubtful Accounts

Nov 3

Uncollectible accounts written off

3,240

Jan 1

Beginning balance

8,750

Dec 31

5% of \(372,400

18,620

5. A credit balance exists in Accounts Receivable (60鈥�90 days) of \)4,840, which represents an advance on a sales contract.

Instructions

Assuming that the books have not been closed for 2017, make the necessary correcting entries.

Use the information from BE7-2, assuming Restin Co. uses the net method to account for cash discounts. Prepare the required journal entries for Restin Co.

From inception of operations to December 31, 2017, Fortner Corporation provided for uncollectible accounts receivable under the allowance method. The provisions are recorded, based on analyses of customers with different risk characteristics. Bad debts written off were charged to the allowance account; recoveries of bad debts previously written off were credited to the allowance account, and no year-end adjustments to the allowance account were made. Fortner鈥檚 usual credit terms are net 30 days.

The balance in Allowance for Doubtful Accounts was \(130,000 at January 1, 2017. During 2017, credit sales totalled \)9,000,000, the provision for doubtful accounts was determined to be \(180,000, \)90,000 of bad debts were written off, and recoveries of accounts previously written off amounted to \(15,000. Fortner installed a computer system in November 2017, and aging of accounts receivable was prepared for the first time as of December 31, 2017. A summary of the aging is as follows.

Classification by month of sale

Balance in each category

Estimated % uncollectible

November-December 2017

\)1,080,000

2%

July-October

650,000

10%

January-June

420,000

25%

Prior to 1/1/17

150,000

80%

\(2,300,000

Based on the review of collectibility of the account balances in the 鈥減rior to 1/1/17鈥� aging category, additional receivables totaling \)60,000 were written off as of December 31, 2017. The 80% uncollectible estimate applies to the remaining \(90,000 in the category. Effective with the year ended December 31, 2017, Fortner adopted a different method for estimating the allowance for doubtful accounts at the amount indicated by the year-end aging analysis of accounts receivable.

Instructions

(a) Prepare a schedule analyzing the changes in Allowance for Doubtful Accounts for the year ended December 31, 2017. Show supporting computations in good form. (Hint: In computing the 12/31/17 allowance, subtract the \)60,000 write-off.)

(b) Prepare the journal entry for the year-end adjustment to Allowance for Doubtful Accounts balance as of December 31, 2017.
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