The Gadzooks Chip Company offers credit terms to its customers. At the end of 20

Question

The Gadzooks Chip Company offers credit terms to its customers. At the end of 2016, accounts receivable totaled $2,449,000. The allowance method is used to account for uncollectible accounts. The allowance for uncollectible accounts had a credit balance of $72,200 at the beginning of 2016 and S48000 in receivables was written off during the year as uncollectible. No previously written off receivables were collected. The company estimates bad debts by applying a percentage of 2% to accounts receivable at the end of the year. 1 Prepare journal entry to record the ite-off of receivables. 2. Prepare journal entries to record the year-end adjusting entry for bad debt expense. Show your computation. 3. How would accounts receivable be shown in the 2016 year-end balance sheet? 4. The company made $1,500,000 net credit sales during the year. If the company had used income statement approach to charge 2% of net credit sales to bad debt expense, how would it be recorded in journal entry? Would it have increased or decreased the amount set aside as allowance for uncollectible accounts?

Explanation / Answer

1. Write off of $48,000 in receivables duringthe year.

the journal entry will be

2.

Working:

3.The account sreceivable will be shown as follows:

4. It would have increased the amount set aside for uncollectible accounts as shown below.

When % of sales is followed , the allowance shall be made for the amount arrived on the

basis of sales ,irrespective of the balance already available in the allowance account.Therefore

the following entry will be recorded for bad debts at the end of the year 2016.

Account Title Debit Credit Allowance for doubtful accounts $48,000 Accounts receivables $48,000

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