Question

Novakowski Products needs to prepare their year-end financial statements. On December 31, 2021, the balance in Accounts Receivable was $680,000. An aging analysis of the accounts receivable indicated that $16,500 of the accounts receivable is expected to be uncollectible.

Instructions;
a) Prepare the adjusting entries to record estimated bad debt expense using the percentage ofreceivables approach for each independent assumption:
i) Allowance for Doubtful Accounts has a credit balance of $3,200 before adjustment.
ii) Allowance for Doubtful Accounts has a debit balance of $730 before adjustment.
b) Determine the carrying amount of the accounts receivable at December 31, 2021 after the required adjustments under each assumption.

Answer 1

To record estimated bad debt expense using the percentage of receivables approach, calculate the adjusting entry based on the percentage of the total accounts receivable that is expected to be uncollectible. The carrying amount of the accounts receivable at December 31, 2021 after the required adjustments is $663,500 for both assumptions.

Step-by-step explanation:

To record estimated bad debt expense using the percentage of receivables approach, we need to calculate the amount of the adjusting entry based on the percentage of the total accounts receivable that is expected to be uncollectible.

a) For assumption i), if the Allowance for Doubtful Accounts has a credit balance of $3,200 before adjustment, we need to determine the amount of bad debt expense. Assuming a 2% rate of uncollectibility, the adjusting entry would be $680,000 (Total Accounts Receivable) * 2% - $3,200 (Allowance for Doubtful Accounts) = $10,600.

For assumption ii), if the Allowance for Doubtful Accounts has a debit balance of $730 before adjustment, we need to determine the amount of bad debt expense. Assuming a 2% rate of uncollectibility, the adjusting entry would be $680,000 (Total Accounts Receivable) * 2% + $730 (Allowance for Doubtful Accounts) = $13,460.

b) The carrying amount of the accounts receivable at December 31, 2021 after the required adjustments would be $680,000 (Total Accounts Receivable) - $16,500 (Uncollectible amount) = $663,500 for both assumptions.