Question

On December 31, 2020, Extreme Fitness has adjusted balances of $800,000 in Accounts Receivable and $55,000 in Allowance for Doubtful Accounts. On January 2, 2021, the company learns that certain customer accounts are not collectible, so management authorizes a write-off of these accounts totaling $10,000. Required: a. What amount would the company report as its net accounts receivable on December 31, 2020? b. Prepare the journal entry to write off the accounts on January 2, 2021. c-1. Assuming no other transactions occurred between December 31, 2020, and January 3, 2021, what amount would the company report as its net accounts receivable on January 3, 2021? c-2. Has net accounts receivable changed from December 31, 2020?

Answer 1

Extreme Fitness's net accounts receivable on December 31, 2020, was $745,000. The journal entry to write off $10,000 on January 2, 2021, would debit Allowance for Doubtful Accounts and credit Accounts Receivable. The net accounts receivable would remain unchanged on January 3, 2021, due to no additional transactions and the allowance already accounting for the write-off.

Step-by-step explanation:

Accounts Receivable Management and Journal Entries

a. On December 31, 2020, Extreme Fitness would report its net accounts receivable by subtracting the Allowance for Doubtful Accounts from the Accounts Receivable. Thus, the net accounts receivable is calculated as $800,000 - $55,000, totaling to $745,000.

b. To write off the accounts on January 2, 2021, Extreme Fitness would make the following journal entry:

Credit Accounts Receivable: $10,000

This entry removes the uncollectible amount from Accounts Receivable and reduces the Allowance for Doubtful Accounts.

c-1. Assuming no other transactions occurred between December 31, 2020, and January 3, 2021, the net accounts receivable on January 3, 2021, would remain unchanged at $745,000.

c-2. The net accounts receivable has not changed from December 31, 2020, because the write-off on January 2, 2021, was already anticipated by the existing Allowance for Doubtful Accounts.