At the beginning of 2008, Hi-Tech Company\'s accounts receivable balance was $14

Question

At the beginning of 2008, Hi-Tech Company's accounts receivable balance was $140,000, and the balance in the Allowance for Bad Debt account was $5,600 (cr.). Hi-Tech's sales during 2008 were $1,050,000, of which 80% were on credit. Collections on account during the year were customers and wrote off a total of $4,000 of uncollectible accounts. One of the accounts written off during the year was for Mr. Jones who originally owed Hi-Tech $1,000. Hi-Tech wrote off his account when he declared bankruptcy in February, but by October, 2008, Mr. Jones had recovered financially and repaid his debt to Hi-Tech in order to clear his good name. 1. Record each of the above transactions and update the A/R and ABT t-accounts. 2. Record year-end adjusting entry for Bad Debt Expense based on the method the company is using. (using both income statement method and balance sheet method) 3. Determine Net Realizable Value of Accounts Receivable under each method.

Explanation / Answer

Step 1: Record each of the above transactions and update the A/R and ABD t-accounts. At the beginning of 2008, Hi-Tech Company's account receivable balance was $140,000, and the balance in the Allowance for Bad Debt account was $5,600(cr.). Hi-Tech's sales during 2008 were $1,050,000, of which 80% were on credit. 1,050,000 x 80% = 840,000 credit sales Dr Accounts Receivable 840,000 Dr Cash 210,000 Cr Sales 1,050,000 Collections on account during the year were $670,000. Dr Cash 670,000 Cr Accounts Receivable 670,000 Throughout the year, the company was able to specifically identify several bad debt customers and wrote off a total of $4,000 of uncollectible accounts. Dr Allowance for Bad Debt 4,000 Cr Accounts Receivable 4,000 One of the accounts written off during the year was for Mr. Jones who originally owed Hi-Tech $1,000. Hi-Tech wrote off his account when he declared bankruptcy in February, but by October, 2008, Mr. Jones had recovered financially and repaid his debt to Hi-Tech in order to clear his good name. Dr Accounts Receivable 1,000 Cr Allowance for Bad Debt 1,000 Dr Cash 1,000 Cr Accounts Receivable 1,000 A/R now = 140,000 + 840,000 - 670,000 - 4,000 + 1,000 - 1,000 = $306,000 Allowance for Bad Debt now = 5,600 - 4,000 + 1,000 = $2,600 (credit balance) Step 2: Record year-end adjusting entry for Bad Debt Expense based on the method the company is using. Income statement method-Assume Hi-Tech estimates 2% of credit Sales to be uncollectible. 840,000 x 2% = 16,800 adjustment Dr Bad Debt Expense 16,800 Cr Allowance for Bad Debt 16,800 The Allowance account now has a 16,800 + 2,600 = 19,400 credit balance Balance Sheet Method-Assume instead that Hi-Tech estimates 6% of year-end A/R to be uncollectible. 306,000 x 6% = 18,360 estimated uncollectible 18,360 - 2,600 current credit balance = 15,760 adjustment Dr Bad Debt Expense 15,760 Cr Allowance for Bad Debt 15,760 The Allowance account now has a 18,360 credit balance. Step 3:Determine Net Realizable Value of Accounts Receivable under each method. Income Statement 306,000 - 19,400 = $286,600 net realizable value Balance Sheet 306,000 - 18,360 = $287,640 net realizable value

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