Question

Bigger corp has numerous clients they sell to on account. At 12/31/21, Bigger1s accounts receivable balance is $550,000

and their balance in their Allowance for Bad Debt account is a credit balance of $25,000
Based on past experience and other factors, the corp estimates that 8% of its account receivable is uncollectable after preparing an Aging of their A/Rec
They determine this to be a material amount and therefore use the Allowance Method
a) prepare the accounting for estimating Bad Debt Exp under the Allowance Method
b) show the Corp's Net Realizable Value after (a) above
c) After accounting for their Allowance at 12/31/21, on 7/1/22 Bigger identifies Customer F to be written off. F owes
them $20,000. Show the accounting for Cust F's write-off under the Allowance Method
d) show the Corp1
s Net Realizable Value after writing off Customer F
#3:
1) What is an 11
aging of accounts receivable11
?
2) State 2 for and 2 reasons against selling on account
3) How does Notes Receivable differ from Accounts Receivable?

Answer 1

a) To estimate Bad Debt Expense under the Allowance Method, Bigger Corp needs to create an adjusting entry at the end of the period. The entry will increase Bad Debt Expense and create a contra-asset account, Allowance for Doubtful Accounts. The entry will be:

Bad Debt Expense 44,000

Allowance for Doubtful Accounts 44,000

The calculation for the entry is: 8% * $550,000 = $44,000.

b) After the adjustment in (a), the net realizable value of Bigger Corp's accounts receivable is:

Accounts Receivable $550,000

Allowance for Doubtful Accounts ($69,000)

Net Realizable Value $481,000

c) To write off Customer F's debt of $20,000 under the Allowance Method, Bigger Corp needs to create another journal entry that decreases both accounts receivable and the allowance account. The entry will be:

Allowance for Doubtful Accounts 20,000

Accounts Receivable - Customer F 20,000

d) After writing off Customer F's debt, the net realizable value of Bigger Corp's accounts receivable is:

Accounts Receivable $530,000

Allowance for Doubtful Accounts ($69,000)

Net Realizable Value $461,000

An aging of accounts receivable is a report that categorizes a company's accounts receivable by the length of time the invoices have been outstanding. The report typically breaks down the receivables by 30-day periods, such as 0-30 days, 31-60 days, 61-90 days, and 91+ days. This report is used to help management identify which accounts are overdue and may require follow-up action, and to estimate the amount of bad debt expense that may need to be recorded.

Selling on account has several advantages, such as increasing sales revenue and customer loyalty. It also allows customers to buy products or services they need without having to pay immediately, which can be beneficial for both parties. However, there are also disadvantages, such as the risk of non-payment, the need to manage accounts receivable and collection efforts, and the potential for bad debt expense. Additionally, selling on account may require additional resources to manage, such as billing and collections staff.

Notes Receivable is a written promise to pay a specified amount of money at a specific future date. Accounts Receivable, on the other hand, represent amounts owed to a company by its customers for goods or services sold on credit. Notes Receivable usually carry interest and have a longer-term repayment schedule compared to Accounts Receivable, which are typically due within a shorter time frame, such as 30 days.