Question

During the current year, Robby's Camera Shop had sales revenue of $157,000, of which $67,000 was on credit. At the start of the

current year, Accounts Receivable showed a $24,000 debit balance and the Allowance for Doubtful Accounts showed a $1,400 credit
balance. Collections of accounts receivable during the current year amounted to $54,000.
Data during the current year follow:
a. On December 31, an Account Receivable (J. Doe) of $1,600 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 2.5 percent of credit sales for the year.
Required:
1. Prepare the required journal entries for the two items on December 31, the 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

To answer the student's question, you need to prepare journal entries for the bad debt expenses and show how these would be reported on the income statement and the balance sheet. The total bad debt expense reported on the income statement would be $3,275, while the net accounts receivable on the balance sheet would be $123,925.

Step-by-step explanation:

Journal Entries and Financial Statement Presentation

To address the student's question regarding Robby's Camera Shop:

1. Prepare journal entries for:

• Bad debt expense related to the write-off of J. Doe's account:
  Bad Debt Expense Dr $1,600
  Allowance for Doubtful Accounts Cr $1,600
• Estimating bad debt expense at year-end:
  Bad Debt Expense Dr $1,675 (2.5% of $67,000 credit sales)
  Allowance for Doubtful Accounts Cr $1,675

Show financial statement presentation:

• On the income statement, Bad Debt Expense for the year would be reported as $1,600 (write-off) + $1,675 (end-of-year adjustment) = $3,275.
• On the balance sheet, Accounts Receivable would be reported at $157,000 total sales - $54,000 collections + $24,000 beginning balance - $1,600 write-off = $125,400 gross receivable. The Allowance for Doubtful Accounts would be $1,400 beginning balance + $1,675 year-end adjustment - $1,600 write-off = $1,475. The net receivable would, therefore, be $125,400 - $1,475 = $123,925.

Answer 2

To answer the student's question, two journal entries for year-end adjustments are required—one to write off uncollectible debt and another to estimate the bad debt expense. On the income statement, the total bad debt expense would be reflected, and the balance sheet would present the adjusted Accounts Receivable and Allowance for Doubtful Accounts.

Step-by-step explanation:

Journal Entries and Financial Reporting

To address the student's question, we must first record the necessary journal entries for the year-end adjustments related to Robby's Camera Shop. Given the data:

1. Writing off Uncollectible Debt:
December 31, Bad Debts Expense .............................. $1,600
Accounts Receivable (J. Doe) .......................................... $1,600
(To record the write-off of uncollectible J. Doe's account)

2. Estimating Bad Debt Expense:
December 31, Bad Debts Expense .............................. $1,675
Allowance for Doubtful Accounts .................................. $1,675
(To record estimated bad debt expense at 2.5% of $67,000 credit sales)

In regards to the financial statements for the current year, the income statement would show Bad Debts Expense totaling $3,275 ($1,600 write-off + $1,675 estimation). On the balance sheet, Accounts Receivable would be $37,000 ($24,000 beginning balance + $67,000 credit sales - $54,000 collections - $1,600 write-off), while Allowance for Doubtful Accounts would be a credit balance of $675 ($1,400 original credit - $1,600 write-off + $1,675 estimation).