Question

The Manda Panda Company uses the allowance method to account for bad debts. At the beginning of 2021, the allowance account had a credit balance of $84,200. Credit sales for 2021 totaled $2,870,000 and the year-end accounts receivable balance was $510,000. During this year, $82,000 in receivables were determined to be uncollectible. Manda Panda anticipates that 2% of all credit sales will ultimately become uncollectible. The fiscal year ends December 31. Required: 1. Does this situation describe a loss contingency? 2. What is the bad debt expense that Manda Panda should report in its 2021 income statement? 3. Prepare the appropriate journal entry to record the contingency. 4. Complete the table below to calculate the net realizable value Manda Panda should report in its 2021 balance sheet.

Answer 1

ANSWER -

1. Yes, this situation describes a loss contingency. The allowance for bad debts is a provision for expected uncollectible accounts and the fact that $82,000 in receivables were determined to be uncollectible during the year indicates that there is a potential loss that needs to be accounted for.

2. The bad debt expense that Manda Panda should report in its 2021 income statement is calculated as follows:
Credit sales x Anticipated % of uncollectible accounts = $2,870,000 x 2% = $57,400
The appropriate journal entry to record the contingency is as follows:
Debit: Allowance for bad debts
Credit: Bad debt expense

4. The net realizable value Manda Panda should report in its 2021 balance sheet is calculated as follows:
Accounts Receivable - Allowance for bad debts = $510,000 - $84,200 = $425,800
Table: Calculation of Net Realizable Value

Description Amount
Accounts Receivable $510,000
Allowance for bad debts ($84,200)
Net Realizable Value $425,800