Accounting Problem! Please explain it!?

Question

Raintree Cosmetic Company sells its products to customers on a credit basis. An adjusting entry for bad debt expense is recorded only at December 31, the company’s fiscal year-end. The 2010 balance sheet disclosed the following:

 Current assets:
  Receivables, net of allowance for uncollectible accounts of $24,000      $600,000

During 2011, credit sales were $1,540,000, cash collections from customers $1,623,160, and $33,500 in accounts receivable were written off. In addition, $4,500 was collected from a customer whose account was written off in 2010. An aging of accounts receivable at December 31, 2011, reveals the following:

                        Percentage of Year-End 	     Percent 	 
  Age Group 	Receivables in Group 	Uncollectible
0–60 days 	      63 	% 	                    4 % 	 
 61–90 days 	      16 	  	                   15    	 
 91–120 days 	       10 	  	                    25    	 
 Over 120 days      11 	  	                    40  
 
REQUIRED:
1) Prepare the year-end adjusting entry for bad debts according to each of the following situations:
     a)Bad debt expense is estimated to be 3% of credit sales for the year.
     b) Bad debt expense is estimated by computing net realizable value of the receivables. The         allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable.
     c) Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is determined by an aging of accounts receivable. 

2)For situations (a)–(c) in requirement 1 above, what would be the net amount of accounts receivable reported in the 2011 balance sheet?

Please explain how to get the answers so I can learn how to do this!

JKRB · Accepted Answer

Beginning Balances:
Accounts Receivable
600,000 + 24,000 = $624,000 gross amount
Allowance for Doubtful Accounts
$24,000

Make journal entries to account for the 2011 transactions
During 2011, credit sales were $1,540,000, 
Dr Accounts Receivable 1,540,000
Cr Sales 1,540,000

cash collections from customers $1,623,160, 
Dr Cash 1,623,160
Cr Accounts Receivable 1,623,160

and $33,500 in accounts receivable were written off. 
Dr Allowance for Doubtful Accounts 33,500
Cr Accounts Receivable 33,500

In addition, $4,500 was collected from a customer whose account was written off in 2010.
Dr Accounts Receivable 4,500
Cr Allowance for Doubtful Accounts 4,500

Dr Cash 4,500
Cr Accounts Receivable 4,500

Ending Balances
Accounts Receivable 
624,000 + 1,540,000 - 1,623,160 - 33,500 + 4,500 - 4,500 = 507,340
Allowance for Doubtful Accounts
24,000 - 33,500 + 4,500 = -5,000 
Since the Allowance account carries a normal CREDIT balance, a negative amount means that it now has a DEBIT balance. 

1) Prepare the year-end adjusting entry for bad debts according to each of the following situations:
a)Bad debt expense is estimated to be 3% of credit sales for the year.
When using percentage of sales, the current balance in the Allowance account is ignored. 
1,540,000 x 3% = 46,200 adjustment
Dr Bad Debt Expense 46,200
Cr Allowance for Doubtful Accounts 46,200
The balance in the Allowance accounts is now 46,200 - 5,000 = 41,200 credit
507,340 - 41,200 = $466,140 Net Accounts Receivable reported

b) Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable.
When using accounts receivable as a basis for estimating bad debt, the current balance in the Allowance account is not ignored. 
507,340 x 10% = 50,734 amount estimated to be uncollectible
50,734 + 5,000 DEBIT balance = 55,734 adjustment
Dr Bad Debt Expense 55,734
Cr Allowance for Doubtful Accounts 55,734
The Allowance account now has a CREDIT balance of 50,734, the same amount that is estimated to be uncollectible. 
507,340 - 50,734 = $456,606 Net Accounts Receivable reported

c) Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is determined by an aging of accounts receivable. 
0–60 days (63% x 507,340 x 4 %) = 12,785
61–90 days (16% x 507,340 x 15%) = 12,176
91–120 days (10% x 507,340 x 25%) = 12.684
Over 120 days (11% x 507,340 x 40%) = 22,323
Total estimated to be uncollectible = 59,968
59,968 + 5,000 DEBIT balance = 64,968 adjustment
Dr Bad Debt Expense 64,968
Cr Allowance for Doubtful Accounts 64,968
The Allowance account now has a CREDIT balance of 59,968, the same amount that is estimated to be uncollectible.
507,340 - 59,968 = $447.372 Net Accounts Receivable reported

Anonymous · Answer

i think the answer is ... c. $55,000 which is the actual amount of november warranty expense.

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