Question

At the beginning of 2017, Miyazaki Company's Accounts Receivable balance was $105,000, and the balance in Allowance for Doubtful Accounts was $1,950. Miyazaki's sales in 2017 were $787,500, 80% of which were on credit. Collections on account during the year were $502,500. The company wrote off $3,000 of uncollectible accounts during the year.

Required
a. Identify and analyze the transactions related to the sales, collections, and write-offs of accounts receivable during 2017.
b. Identify and analyze the adjustments to recognize bad debts assuming that (a) bad debts expense is 3% of credit sales and (b) amounts expected to be uncollectible are 6% of the yearend accounts receivable.
c. What is the net realizable value of accounts receivable on December 31, 2017, under each assumption in part (2)?
d. What effect does the recognition of bad debts expense have on the net realizable value? What effect does the write-off of accounts have on the net realizable value?

Answer 1

Miyazaki Company

a. Analysis of transactions:

Sales in 2017 = $787,500

Credit Sales = $630,000 (80% of $787,500)

Total collections on account = $502,500

Uncollectibles written off = $3,000

Unpaid balance for the year = $229,500 ($105,000 + $124,500)

b. a) Bad Debt Expense = $18,900

b) Bad Debt Expense = $14,820

c. Net Realizable Value of Accounts Receivable on December 31:

a) b)

Unpaid balance for the year $229,500 $229,500

Allowance for doubtful accounts (18,900) (14,820)

Net Realizable Value = $210,600 $214,680

d. The recognition of bad debts expense does not have any direct effect on the net realizable value. It is the Allowance for doubtful accounts that has a negative effect on the net realizable value.

The write-off of accounts reduces the net realizable value by $3,000.

Step-by-step explanation:

a) Data and Calculations:

Beginning balances:

Accounts receivable = $105,000

Allowance for Doubtful Accounts = $1,950

Sales in 2017 = $787,500

Credit Sales = $630,000 (80% of $787,500)

Total collections on account = $502,500

Uncollectibles written off = $3,000

Unpaid balance for the year = $229,500 ($105,000 + $124,500)

Bad Debts Expense = $18,900 ($630,000 * 3%)

Allowance for Uncollectibles = $13,770 ($229,500 * 6%)

a) Allowance for Doubtful Accounts:

Account Titles Debit Credit

Beginning balance $1,950

Accounts receivable $3,000

Bad Debts Expense 18,900

Balance 17,850

b) Allowance for Doubtful Accounts:

Account Titles Debit Credit

Beginning balance $1,950

Accounts receivable $3,000

Bad Debts Expense 14,820

Balance 13,770