PROBLEM #3 Erickson Company had a $400 credit balance in Allowance for Doubtful
ID: 2512990 • Letter: P
Question
PROBLEM #3 Erickson Company had a $400 credit balance in Allowance for Doubtful Accounts at December 31, 2012, before the current year's provision for uncollectible accounts. An aging of the accounts receivable revealed the following: Estimated Percentage Uncollectible Current Accounts 1-30 days past due 31-60 days past due 61-90 days past due Over 90 days past due Total Accounts Receivable $170,000 15,000 12,000 5,000 9,000 $211000 190 3% 5% 12% 30% Instructions (a) Prepare the adjusting entry on December 31, 2012, to recognize bad debts expense (b) Assume the same facts as above except that the Allowance for Doubtful Accounts account had a $400 debit balance before the current year's provision for uncollectible accounts. Prepare the adjusting entry for the current year's provision for uncollectible accounts. PROBLEM #4: Great Plains Supply Co. has the following transactions related to notes receivable during the last 2 months of the year I oaned $90,000 cash to B. Benson on a 1-year, 8% note 7% note. Nov 1 00000 a0-dayExplanation / Answer
Solution:
Allowance for Doubtful Account Method
Under Allowance for Doubtful Debt method, the company uses an estimate for allowance for doubtful debt by using specified method and accordingly book Bad Debt Expenses for the period.
Allowance method creates bad debts expenses before the company knows specifically which customers will not pay on the basis of prior history and prior experience.
There are two approaches for recording of Bad Debt Expense under allowance for doubtful account method.
(i) Balance Sheet Approved or Accounts Receivable Aging Method -- Under this, on the basis of prior years’ experience company can reasonably estimated what percentage of accounts receivable measure will not be collected.
(ii) Income Statement Approach or Percentage on Credit Sales method --- under this method, company can reasonably estimate what percentage of credit sales will not be collected.
Part a --- This question is related to Accounts Receivable Aging Method. So we need to first determined the Estimated Uncollectible Amount for the period as follows:
Due
Accounts Receivable (A)
Estimated Percentage Uncollectible (B)
Uncollectible Amount (A*B)
Current Account
$170,000
1%
$1,700
1 - 30 days
$15,000
3%
$450
31 - 60 days
$12,000
6%
$720
61 - 90 days
$5,000
12%
$600
Over 90 days
$9,000
30%
$2,700
$211,000
$6,170
Total Estimated Uncollectible Amount for the period = $6,170
Since company already has credit balance of $400 in Allowance for Doubtful Account, we need to adjust this amount to make it $6,170. To do that we need to credit Allowance for Doubtful Account by $5,770
Following adjustment entry is passed on Dec.31, 2012 to record bad debt expense
Date
General Journal
Debit
Credit
Dec.31, 2012
Bad Debt Expense
$5,770
Allowance for Doubtful Account
$5,770
Hence, the Bad Debt Expenses for the period is $5,770
Part b ---
Given is $400 debit balance in Allowance for Doubtful Account and the estimated uncollectible amount as calculated in part a is $6,170 Credit balance.
So, we need to adjust $400 debit balance to $6,170 credit balance.
To do that we need to credit this account by $6,570 (6170 + 400) to make it $6,170 Credit balance and Debit the Bad Debt Expense with $6,570.
Date
General Journal
Debit
Credit
Dec.31, 2012
Bad Debt Expense
$6,570
Allowance for Doubtful Account
$6,570
Hence, the Bad Debt Expense for the period is $6,570
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Due
Accounts Receivable (A)
Estimated Percentage Uncollectible (B)
Uncollectible Amount (A*B)
Current Account
$170,000
1%
$1,700
1 - 30 days
$15,000
3%
$450
31 - 60 days
$12,000
6%
$720
61 - 90 days
$5,000
12%
$600
Over 90 days
$9,000
30%
$2,700
$211,000
$6,170
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.