Question

A company reported the following items for 2013:

Accounts receivable balance, Jan 1, 2013                                          $80,000

Allowance for uncollectible accounts balance, Jan. 1, 2013 12,000

Total credit sales during 2013    400,000

Total cash collections on accounts receivable during 2013    360,000

Account written off during 2013                                                          15,000

The account balances shown above are normal balances. Experience indicates that 4% of the gross accounts receivable balance at the end of each year ultimately will be uncollectible OR 1.5% of credit sales. During 2014, an account valued at $12,000 was written off. Later in the year, the customer showed up and paid the full amount.

Required:

Record the journal entries for a) the adjusting entry at the 2013 year end assuming the balance sheet approach, b) the adjusting entry at the 2013 year end assuming the income statement approach, c) the write off in 2014, and d) the later recovery.

Answer 1

a) the adjusting entry at the 2013 year end assuming the balance sheet approach,
Bad Debt Expense (Dr) ................................... 4200 (Increase in Expense)
Allowance for uncollectible accounts (Cr)..................... 4200 (Increase in contra asset or say Decrease in Asset)

Bad Debt Expense = 4% of the gross accounts receivable balance at the end of each year
Bad Debt Expense = 4% of the (80000 + 400000 - 360000 - 15000)
Bad Debt Expense = 4% of the 105000
Bad Debt Expense = 4200

b) the adjusting entry at the 2013 year end assuming the income statement approach,
Bad Debt Expense (Dr) ................................... 6000 (Increase in Expense)
Allowance for uncollectible accounts (Cr)..................... 6000 (Increase in contra asset or say Decrease in Asset)

Bad Debt Expense = 1.5% of credit sales
Bad Debt Expense = 1.5% of the 400000
Bad Debt Expense = 6000

c) the write off in 2014,
Allowance for uncollectible accounts (Dr)........ 12000 (Decrease in contra asset)
                         Accounts receivable (Cr) ................................................12000 (Decrease in Asset)

d) the later recovery.
Accounts receivable (Dr) ................................................12000 (Increase in Asset)
Allowance for uncollectible accounts (Cr).................................. 12000 (Increase in contra asset)

Cash (Dr)..........................................................12000 (Increase in Asset)
Accounts receivable (Cr) ................................................12000 (Decrease in Asset)