Question

During the current year, Robby’s Camera Shop had sales revenue of $168,000, of which $74,000 was on credit. At the start of the current year, Accounts Receivable showed a $18,000 debit balance, and the Allowance for Doubtful Accounts showed a $1,800 credit balance. Collections of accounts receivable during the current year amounted to $55,000. Data during the current year follows:

A. On December 31 an Account Receivable (J. Doe) of $1,000 from a prior year was determined to be uncollectible; therefore, it was written off immediately as a bad debt.
B. On December 31, on the basis of experience, a decision was made to continue the accounting policy of basing estimated bad debt losses on 3.0% of credit sales for the year.
Required:
1. Prepare the required journal entries for the two items on December 31, end of the accounting period.
2. Show how the amounts related to Accounts receivable and Bad debt expense would be reported on the income statement and balance sheet for the current year. Disregard income tax considerations.

Answer 1

Robby's Camera Shop

1. Journal Entries:

Debit Bad Debts Expense $1,000

Credit Accounts Receivable $1,000

To write off bad debts (J. Doe).

2. Debit Bad Debts Expense $420

Credit Allowance for Doubtful Accounts $420

To bring the allowance to $2,220 balance.

Step-by-step explanation:

a) Data and Calculations:

1. Accounts Receivable balance:

Beginning balance (debit) $ 18,000

Credit Sales during the current year $74,000

Collections during the current year (55,000)

Bad debts (written off) (1,000)

Ending balance (debit) $ 36,000

2. Allowance for Doubtful Accounts:

Beginning balance (credit) $1,800

Bad Debts Expense 420

Ending balance (Credit) $2,220

3. Bad Debts Expense:

Accounts receivable $1,000

Allowance for doubtful accounts $420

Total bad debts expense = $1,420

4. 3% of credit sales = $2,220 ($74,000 * 3%)