ACCOUNTS RECEIVABLE (6 points) The following information is from the 2014 record

Question

ACCOUNTS RECEIVABLE (6 points) The following information is from the 2014 records of Baker Donut Shop: Accounts Receivable, December 31, 2014 $60,000 normal balance $500 Debit prior to adjustment $150,000 Allowance for Uncollectibles, December 31,2014 Net Credit Sales for 2014 A. (3 pts) Uncollectible Accounts Expense is estimated by the percent-of-sales method. Management estimates that 5% of net credit sales will be uncollectible, what will be the amount of the contra asset Allowance for Uncollectible Accounts after adjustments for uncollectible expense if Baker uses the percent of net sales method? MSI Midterm 2 Review Econ 10 A B. (3 pts) Baker decided to use the aging of the accounts receivable method and in reviewing the accounts receivable the below was revealed: Current Accounts $30,000 1 % Estimated Uncollectible 1-30 Days Past Due 17,000 31-60 Days past due 5,000 61-90 Days past due 6,000 Over 90 Days past due 2,000 596 | 6% 10% 20% TOTAL A/R $60,000 Prepare the adjusting entry on December 31, 2014 to recognize BDE under the aging of receivables method

Explanation / Answer

A) Under the percentage of sales method the bad debts expense each year is a certain percentage of the net credit sales for the period. In this instance, it is 5% of $150000 = $       7,500.00 This amount is expensed as 'Bad debts expense', the credit going to the 'Allowance for Uncollectibles' account. The 'allowance for uncollectibles' will have a balance of -$500 (existing debit balance) in the account+$7500 = $7,000. Answer: $7,000 B) Under the aging method the uncollectible is first ascertained as below: Category Amount outstanding % estimated uncollectible Uncollectible amount Current accounts 30000 1 300 1-30 days past due 17000 5 850 31-60 days past due 5000 6 300 61-90 days past due 6000 10 600 Over 91 days 2000 20 400 TOTAL ACCOUNTS RECEIVABLE 60000 2450 The amount to be available in the allowance account is credit of $2450. As it is already having a debit balance of $500, the allowance account is to be credited with $2950, which is the bad debts expense for the year. The journal entry would be: Bad debts expense 2950 Allowance for uncollectibles 2950 The EOY balance in the allowance account under this method would be $2,450.

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