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Problem 4: Classic Auto Parts sells new and used auto parts. Although a majority of its...

Problem 4:

Classic Auto Parts sells new and used auto parts. Although a majority of its sales is cash sales, it makes a significant amount of credit sales. During Year 1, its first year of operations, Classic Auto Parts experienced the following:

                                Sales on account                                                                                               $320,000

                                Cash sales                                                                                                           $680,000

                                Collections of accounts receivable                                                            $295,000

                                Uncollectible accounts written-off during the year                            $1,400

Required: Answer the following questions.

  1. Assume that Classic Auto Parts uses the allowance method of accounting for bad debt amounts and estimates that 1% of its sales on account will not be collected. Answer the following questions:
    1. What is the Accounts Receivable balance at December 31, Year 1?
  1. What is the amount of bad debt expense for Year 1?

  1. What is the ending balance for Allowance for Doubtful Accounts at December 31, Year 1, after all entries and adjusting entries are posted?

  1. What is the net realizable value of accounts receivable at December 31, Year 1?
  1. What is the journal entry to record the uncollectible accounts written-off during the year?

  1. What is the journal entry to record bad debt expense for Year 1?
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Homework Answers

Answer #1

a) Account receivable balance at December 31, Year 1 = 320000-295000-1400 = $23600

b) Bad debt expense = 320000*1% = 3200

c) Ending balance of allowance for doubtful accounts = 3200-1400 = 1800

d) Net realizable value = 23600-1800 = 21800

e) Journal entry

Date Account and explanation Debit Credit
Allowance for doubtful accounts 1400
Account receivable 1400

f) Journal entry

Date Account and explanation Debit Credit
Bad debt expense 3200
Allowance for doubtful accounts 3200
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