The ledger of Costello Company at the end of the current year shows Accounts Rec

Question

The ledger of Costello Company at the end of the current year shows Accounts Receivable $111,000, Sales Revenue $841,000, and Sales Returns and Allowances $21,000.

If Costello uses the direct write-off method to account for uncollectible accounts, journalize the adjusting entry at December 31, assuming Costello determines that L. Dole’s $1,500 balance is uncollectible

If Allowance for Doubtful Accounts has a credit balance of $2,200 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales, and (2) 10% of accounts receivable

Please do not only give the correct answer but also explain how it was obtained. Thanks

Explanation / Answer

First part:

In the direct write-off method, a company will not use an allowance account to reduce its Accounts Receivable. Accounts Receivable is only reduced if and when a company knows with certainty that a specific amount will not be collected from a specific customer.

ssuming Costello determines that L. Dole’s $1,500 balance is uncollectible, the journal entry to be passed is:

Bad debt expense.......................................Dr. $1500

Accounts receivable .................................................Cr. $1500

Second part:

(1) Bad debt expense = 1% of net sales = $841000 x 1% = $8410

In Net sales method, bad debt expense is not adjusted with the balance in tthe accounts receivable account.

Journal:

Bad debt expense.............................................Dr. $8410

Allowance for doubtful debt ............................................Cr. $8410

(2) Bad debt expense = 10% of accounts receivable = $111000 x 10% = $11100

In this method, the allowance for doubtful debt will be adjusted with the previous balance in allowance account if there is any.

The credit balance in the allowance for doubtful debt account = $2200

The bad debt expense to be charged to the allowance for doubtful debt account = $11100 - $2200 = $8900

Bad debt expense ............................................Dr. $8900

Allowance for doubtful debt...............................................Cr. $8900

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