please help me with all of these questions. thank you PSA7.8 At 31 December 2016
ID: 2512310 • Letter: P
Question
please help me with all of these questions. thank you
PSA7.8 At 31 December 2016, the trlal balance of Lexington Pty Ltd contalned the following amounts before adjustment: DEBITS CREDITS Accounts Receivable Allowance for Doubtful Debts Sales $400 ooo $1 000 950 000o Requlred a. Based on the Information given, which method of accounting for bad debts is Lexington Pty Ltd using the b. Prepare the adjusting entry at 31 December 2016, for bad debts expense assuming that the ageing schedule C. Repeat part (b) assuming that instead of a credit balance there is a $10o0 debit balance in the Allowance for d. During the next month, January 2017, a $5000 account recelvable is written off as uncollectable. Prepare the e. Repeat part (d) assuming that Lexington uses the direct write-off method Instead of the allowance method In f. What type of account is the Allowance for Doubtful Debts? How does it affect how accounts direct write-off method or the allowance method? How can you tell? indicates that $11 750 of accounts recelvable will be uncollectable Doubtful Debts. Journal entry to record the write-off accounting for uncollectable accounts receivable recelvable is reported on the statement of financial position at the end of the accounting period?Explanation / Answer
a.
The company is using allowance method. Creating a separate account “allowance for doubtful debts” tells such happening.
In case of direct write-off, bad debt account is debited; but it doesn’t follow the matching principle of accounts, because the year of written off may be different from the year of on-account sale. Such problem is sorted out through allowance method, since the amount of uncollectible subtracted from accounts receivable to get the net figure during the year of sale.
b.
Here the target balance is $11,750. Since there is an unadjusted credit balance in the allowance account, the bad debt expense would be as below:
Bad debt expense = Target balance – Unadjusted credit balance of allowance account
= 11,750 – 1,000
= $10,750
Journal
Date
Account titles and explanation
P.ref
Debit
Credit
31/12/2016
Bad debt expense
$10,750
Allowance for doubtful debts
$10,750
To record adjusting entry for bad debts
c.
Here the target balance is $11,750. Since there is an unadjusted debit balance in the allowance account, the bad debt expense would be as below:
Bad debt expense = Target balance + Unadjusted debit balance of allowance account
= 11,750 + 1,000
= $12,750
Journal
Date
Account titles and explanation
P.ref
Debit
Credit
31/12/2016
Bad debt expense
$12,750
Allowance for doubtful debts
$12,750
To record adjusting entry for bad debts
d.
In this case the allowance account would be debited in exchange of credit in accounts receivable; therefore, there would be no effect in the income statement.
Journal
Date
Account titles and explanation
P.ref
Debit
Credit
Jan, 2017
Allowance for doubtful debts
$5,000
Accounts receivable
$5,000
To record write-off an uncollectible account under the allowance method
e.
In case of direct method, bad debt account would be debited instead of allowance account; it reduces profit in the income statement.
Journal
Date
Account titles and explanation
P.ref
Debit
Credit
Jan, 2017
Bad debt expense
$5,000
Accounts receivable
$5,000
To record write-off an uncollectible account under the direct method
f.
Allowance for doubtful debt is a contra account, which is directly connected to accounts receivable account.
Affect: It increases accounts receivable if the balance is debit; it reduces accounts receivable if the balance is credit.
Date
Account titles and explanation
P.ref
Debit
Credit
31/12/2016
Bad debt expense
$10,750
Allowance for doubtful debts
$10,750
To record adjusting entry for bad debts
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