Notes: •Direct write-off method: records bad debt expense only when an account i

ID: 2532828 • Letter: N

Question

Notes:

•Direct write-off method: records bad debt expense only when an account is judged to be worthless

•Allowance method: records bad debt expense by estimating uncollectible accounts at the end of the accounting period

--On August 31, Target Inc. had an unadjusted credit balance of $1,500 in its Allowance for Uncollectible Account. An analysis of Target Inc.’s accounts receivables revealed the following: (Target Inc. uses the aging of receivables method to estimate its bad debt expense)

Age (days) Amount Estimated as Uncollectible

0-30 $60,000 5%

31-60 $ 4,000 10%

> 60 $ 2,000 70%

What amount should Target Inc. report as Allowance for Uncollectibles on its 12/31st Balance Sheet?

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--HEB Inc. determined the Net value of its Accounts Receivables on 12/31/15. The company uses the aging of receivables method to estimate Bad Debt Expense. The following is important information:

1/1/15…. Allowance for Uncollectibles………………..……...$ 30,000

Uncollectible accounts written off during 2015……………$ 18,000

Uncollectible accounts recovered during 2015…………….$ 2,000

Accounts Receivables, net on 12/31/15……………………….$350,000

In 2015 what was HEB Inc.’s Bad Debt Expense?

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--On 1/1/2014, Pyro Inc. had a credit balance of $260,000 in its Allowance for Uncollectible accounts. Based on past experience, 2% of Pyro Inc.’s credit sales have been uncollectible. During 2014, Pyro Inc. wrote off $325,000 of uncollectible accounts. Credit sales for 2014 were $9,000,000.

On 12/31/14, what amount should Pyro Inc. report on its Balance Sheet as Allowance for Uncollectible Accounts?

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--On 12-31-12, Target Inc.’s balance sheet reported Accounts Receivable of $100,000 before Allowance for Uncollectibles of $10,000. Credit sales during 2013 were $611,000 and collections from customers were $591,000. During 2013, Accounts Receivables of $45,000 were written off and $17,000 were recovered. On 12-31-13, Ginger Inc. estimated that $15,000 of its Accounts Receivables were uncollectible.

What amount should Ginger Inc. report as Accounts Receivables on 12/31/13?

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--H3H3 Co., had Credit sales of $10,000,000 in 2011. The company also had a year-end balances in its Accounts Receivables and Allowance for Uncollectibles accounts of $300,000 and $50,000 respectively. H3H3 Co., used 3% of Accounts Receivables to determine it Allowance for Uncollectible accounts at year-end.

By what amount should H3H3 Co., adjust Allowance for Uncollectible accounts on 12-31-11?

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Explanation / Answer

Solution:

Problem 1 --- Target Inc.

Calculation of Estimated Uncollectible Amount

Days

Amount

Percentage of Esimated Uncollectible

Estimated Uncollectible Amount

A*B

0-30

$60,000

$3,000

31-60

$4,000

10%

$400

More than 60 Days

$2,000

70%

$1,400

$4,800

Total Estimated Uncollectible Amount = $4,800

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.

On the basis of prior years’ experience company can reasonably estimated what percentage of accounts receivable measure will not be collected.

Since, Allowance for Uncollectible Accounts has already unadjusted credit balance $1,500, we need to adjust this balance to estimated uncollectible amount for the period as calculated above $4,800.

So, the Target Inc. should report the amount as Allowance for Uncollectibles on its 12/31st Balance Sheet = $4,800

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