Question

Brown Cow Dairy uses the aging approach to estimate bad debt expense. The ending balance of each account receivable is aged on the basis of three time periods as follows: (1) not yet due, $15,000; (2) up to 120 days past due, $8,000; and (3) more than 120 days past due, $3,000. Experience has shown that for each age group, the average loss rate on the amount of the receivables at year-end due to uncollectibility is (1) 3 percent, (2) 11 percent, and (3) 20 percent, respectively. At December 31 (end of the current year), the Allowance for Doubtful Accounts balance is $750 (credit) before the end-of-period adjusting entry is made. Data during the current year follow: a. During December, an Account Receivable (Patty's Bake Shop) of $700 from a prior sale was determined to be uncollectible; therefore, it was written off immediately as a bad debt. b. On December 31, the appropriate adjusting entry for the year was recorded. Required: 1. Give the required journal entries for the two items listed above. 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.

Answer 1

A1. Dr Allowance for doubtful accounts $700

Dr Account receivable $700

2. Dr Bad debt expense $1,180

Cr Allowance for doubtful accounts $1,180

B. Operating Expense

Bad debt expense $1,180

Current Assets

Accounts Receivable $24,070

Explanation:

A. Preparation of the journal entries for the two items

First step is to calculate the Allowance for doubtful account balance

Allowance for doubtful account balance = (15,000*3%+8,000*11%+3,000*20%)

Allowance for doubtful account balance =$450+$880+$600

Allowance for doubtful account balance =$1,930

Now let prepare the journal entries

1. Dr Allowance for doubtful accounts $700

Dr Account receivable $700

2. Dr Bad debt expense ($1,930-$750) $1,180

Cr Allowance for doubtful accounts $1,180

B. Calculation to 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

INCOME STATEMENT PRESENTATION

OPERATING EXPENSE

Bad debt expense $1,180

($1,930-$750)

BALANCE SHEET PRESENTATION

CURRENT ASSETS

Account receivable $26,000

($15,000+$8,000+$3,000)

Less: Allowance for doubtful accounts ($1,930)

Accounts Receivable $24,070

Therefore the amounts related to Accounts Receivable and Bad Debt Expense would be reported on the income statement and balance sheet for the current year as :

Operating Expense:

Bad debt expense $1,180

Current Assets:

Accounts Receivable $24,070