E8-3 The ledger of Costello Company at the end of the current year shows Account

Question

E8-3 The ledger of Costello Company at the end of the current year shows Accounts Receivable $110,000, Sales Revenue $840,000, and Sales Returns and Allowances $20,000.

Instructions

(a) 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 $1,400 balance is uncollectible.

(b) IfAllowanceforDoubtfulAccountshasacreditbalanceof$2,100inthetrialbalance, 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.

(c) If Allowance for Doubtful Accounts has a debit balance of $200 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 0.75% of net sales and (2) 6% of accounts receivable.

Explanation / Answer

a)Bad debt expense(db)1400
Account receivable(Cr)1400
b)Net sales = Sales Revenue-Sales Returns and Allowances
=840,000 -28,000 =812,000
=1% of net sales = $8,120
Bad debts expense (db)8,120
Allowance for Doubtful Accounts (cr) 8,120
10% of accounts receivable = 10% x $110,000 = $11,000,
since we want to have a credit balance of $11,000, but it already has a credit balance of $2,100, so you only need another 8,900
Bad debts expense(db) 8,900
Allowance for Doubtful Accounts (cr)8,900
c)0.75% of net sales = 0.75% x $812,000 = $6,090
Bad debts expense (db)6,090
Allowance for Doubtful Accounts(cr) 6,090
6% of accounts receivable = 6% x $110,000 = $6,600,
since we want to have a a credit balance of $20000, but it has a DEBIT balance of $200, so your adjustment amount is $6,800
Bad debts expense(db) 6,800
Allowance for Doubtful Accounts(cr) 6,800

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