Problem Set A Copeland Company had the following account balances at December 31

Question

Problem Set A Copeland Company had the following account balances at December 31, 2016, before recording bad debt expense for the year: Unadjusted Trial Balance Accounts receivable $1,400,000 Allowance for uncollectible accounts (credit balance) 22,000 Credit sales for 2016 1,950,000 Ending 12/31/2015 Balance in Accounts receivable on 1/1/2016 $1,200,000 Balance in Allowance for uncollectible accounts (credit balance) on 1/1/2016 24,000 Copeland is considering the following approaches for estimating bad debts for 2016: Option A: Based on 3% of credit sales Option B: Based on an aging of year-end accounts receivable Days Amount Outstanding Estimated % Uncollectible 0-30 $800,000 3% $24,000 31-60 300,000 6% $18,000 61-120 200,000 9% $18,000 Over 120 100,000 24% $24,000 $1,400,000 $84,000 REQUIRED: 1 Do the adjusting journal entry to record Bad debt expense and allowance for uncollectible accounts under Option A and Option B. 2 what are the gross accounts receivable and net account receivables under Option A and Option B. 3 What is the difference in accounts receivable turnover and the credit risk ratio under Option A v. Option B? 4 Which option may management prefer? Which option may shareholders or regulators prefer? Please discuss Problem Set A Copeland Company had the following account balances at December 31, 2016, before recording bad debt expense for the year: Unadjusted Trial Balance Accounts receivable $1,400,000 Allowance for uncollectible accounts (credit balance) 22,000 Credit sales for 2016 1,950,000 Ending 12/31/2015 Balance in Accounts receivable on 1/1/2016 $1,200,000 Balance in Allowance for uncollectible accounts (credit balance) on 1/1/2016 24,000 Copeland is considering the following approaches for estimating bad debts for 2016: Option A: Based on 3% of credit sales Option B: Based on an aging of year-end accounts receivable Days Amount Outstanding Estimated % Uncollectible 0-30 $800,000 3% $24,000 31-60 300,000 6% $18,000 61-120 200,000 9% $18,000 Over 120 100,000 24% $24,000 $1,400,000 $84,000 REQUIRED: 1 Do the adjusting journal entry to record Bad debt expense and allowance for uncollectible accounts under Option A and Option B. 2 what are the gross accounts receivable and net account receivables under Option A and Option B. 3 What is the difference in accounts receivable turnover and the credit risk ratio under Option A v. Option B? 4 Which option may management prefer? Which option may shareholders or regulators prefer? Please discuss

Explanation / Answer

1 Option A Credit sales 1950000 Percentage of credit sales not collected 3% Bad debt expense 58500 Journal entry Bad debt expense 58500             Allowance for uncollectible accounts 58500 Option B Aging method balance 84000 Less Allowance for uncollectible balance 1/1/ 2016 24000 Bad debt expense 60000 Journal entry Bad debt expense 60000             Allowance for uncollectible accounts 60000 2 Option A Option B Gross accounts receivable 1400000 1400000 Less Allowance for uncollectible at end 84000 82500 Net accounts receivable 1316000 1317500 3 Accounts receivable turnover = net credit sales /Average accounts receivable Net sales 1950000 1950000 Beginning accounts receivable 1176000 1176000 Ending accounts receivable 1316000 1317500 Average accounts receivable 1246000 1246750 Accounts receivable turnover 1.57 1.56

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