Percent of Sales Method At the end of the current year, Accounts Receivable has

Question

Percent of Sales Method

At the end of the current year, Accounts Receivable has a balance of $660,000; Allowance for Doubtful Accounts has a credit balance of $6,000; and sales for the year total $2,970,000. Bad debt expense is estimated at 1.1% of sales.

1. Determine the amount of the adjusting entry for uncollectible accounts.

$

2. Determine the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense.

Accounts Receivable $

Allowance for Doubtful Accounts $

Bad Debt Expense $

3. Determine the net realizable value of accounts receivable.

$

Explanation / Answer

Solution:

Balances at the end of current year

Accounts Receivable (debit balance)

$660,000

Allowance for Doubtful Accounts (Credit balance)

$6,000

Sales for the year total

$2,970,000

Bad Debt Expenses (1.1% x $2,970,000)

$32,670

1) Determine the amount of the adjusting entry for uncollectible accounts.

Bad Debt Expenses to be recorded for the current year = $32,670

Following entry is to be passed to record bad debt expenses

Bad Debt Expenses Dr. $32,670

To Allowance for Doubtful Account $32,670

The effect of this entry is, it will increase the credit balance of Allowance for Doubtful Accounts by $32,670

Hence the amount of the adjusting entry for Uncollectible Accounts is $32,670

2) Determine the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense.

Accounts Receivable $660,000

Allowance for Doubtful Accounts ($6,000 + $32,670) $38,670

Bad Debt Expense $32,670

3) Determine the net realizable value of accounts receivable.

Net Realizable Value of Accounts Receivable = Accounts Receivable – Allowance for Doubtful Accounts = $660,000 - $38,670 = $621,330

Note ---- Under the Allowance for Doubtful Accounts method, bad debt expenses are recorded on approximate by using past experience basis that will not be collected. In this method a account named “Allowance for Doubtful Accounts” are created to hold the uncollectible amount of Accounts Receivables.

Balances at the end of current year

Accounts Receivable (debit balance)

$660,000

Allowance for Doubtful Accounts (Credit balance)

$6,000

Sales for the year total

$2,970,000

Bad Debt Expenses (1.1% x $2,970,000)

$32,670

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