Question

On December 31, 2020, Corotel Company’s year-end, the unadjusted trial balance included the following items:

Account		Debit		Credit
Accounts receivable	$	2,140,000
Allowance for doubtful accounts		37,000
Sales ($3,210,000 cash sales)			$	12,840,000

Required:
1. Prepare the adjusting entry needed in Corotel’s books to recognize bad debts under each of the following independent assumptions.

1. Bad debts are estimated to be 2% of credit sales.
2. An analysis suggests that 5% of outstanding accounts receivable on December 31, 2020, will become uncollectible.

2. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear on the December 31, 2020 balance sheet given the facts in requirement 1(a).

3. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear on the December 31, 2020 balance sheet given the facts in requirement 1(b).

Answer 1

1 (a) Credit sales = Total sales - Cash sales

= $12,840,000 - $3,210,000

= $9,630,000

Bad debt expense = Credit sales * 2%

= $9,630,000 * 2%

= $192,600

Journal entry

Bad debt expense	$192,600
Allowance for doubtful accounts		$192,600

1 (b) Bad debt expense = (Accounts receivable * 5%) + Debit balance in allowance for doubtful accounts

= $107,000 ($2,140,000 * 5%) + $37,000

= $144,000

Journal entry

Bad debt expense	$144,000
Allowance for doubtful accounts		$144,000

2.

Accounts receivable	$2,140,000
Less : Allowance for doubtful accounts	$155,600 ($192,600-$37,000)
Net accounts receivable	$1,984,400

3.

Accounts receivable	$2,140,000
Less : Allowance for doubtful accounts	$107,000 ($144,000-$37,000)
Net accounts receivable	$2,033,000