The December 31, 2009 balance sheet of Hampton Company had Accounts Receivable o

Question

The December 31, 2009 balance sheet of Hampton Company had Accounts Receivable of $500,000 and a credit balance in Allowance for Doubtful Accounts of $33,000. During 2010, the following transactions occurred: sales on account $1,600,000; sales returns and allowances, $50,000; collections from customers, $1,150,000; accounts written off $35,000; previously written off accounts of $5,000 were collected. Instructions (a) Journalize the 2010 transactions. (b) If the company uses the percentage of sales basis to estimate bad debts expense and anticipates 2% of net sales to be uncollectible, what is the adjusting entry at December 31, 2010? (c) If the company uses the percentage of receivables basis to estimate bad debts expense and determines that uncollectible accounts are expected to be 4% of accounts receivable, what is the adjusting entry at December 31, 2010? (d) Which basis would produce a higher net income for 2010 and by how much? last question that is kicking my tail.....

Explanation / Answer

31 Dec 2010 Acct Raxable Dr 400,000 Cash DR 1150,000 Sales returns and allowances Dr $50,000 Sales Cr $1,600,000 (To record Sales of 1600,000, collections and Return & ALlow) 31 Dec 2010 Accounts Receivable Dr 5,000 Allowance for Doubtful Accounts Cr 5,000 31 Dec 2010 Cash Dr 5,000 Accounts Receivable Cr 5000 (previously written off accounts of $5,000 were collected) 31 Dec 2010 Allow for Doubtful Accts Dr 35,000 Acct rxable Cr 35,000 (Towrite off of Acct Rxable of 35000, Allow for Bad debts has open Bal of 33000 + 5000 - 35000 = 3000 Cr Bal)) (b) If the company uses the percentage of sales basis to estimate bad debts expense and anticipates 2% of net sales to be uncollectible, what is the adjusting entry at December 31, 2010? 2% of net Credit Sales = 2%*(400,000-50,000) = 7000 As Allow for Bad debts already has a Cr Bal of 3000 as above, we need addl prov of $4000. So entry will be 31 Dec 2010 Bad Debt Expense Dr 4000 Allow for uncollectible accounts Cr 4000 (c) If the company uses the percentage of receivables basis to estimate bad debts expense and determines that uncollectible accounts are expected to be 4% of accounts receivable, what is the adjusting entry at December 31, 2010? 4%*(Op Bal of Accounts Receivable of $500,000 + Credit Sales 400,000-Return & Allow 50,000) = 4%*850,000 = $34,000. Existing credit Bal is 3000 as per (a) 31 Dec 2010 Bad Debt Expense Dr 31,000 Allow for uncollectible accounts Cr 31,000 (d) Which basis would produce a higher net income for 2010 and by how much? As can be seen, percentage of sales basis produce a Higher Net income. The provision is more by 31000-4000 = 27,000. SO percentage of sales basis will give a higher Income by $27,000

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