Question

At the beginning of 2021, Brad’s Heating & Air (BHA) has a balance of $24,200 in accounts receivable. Because BHA is a privately owned company, the company has used only the direct write-off method to account for uncollectible accounts. However, at the end of 2021, BHA wishes to obtain a loan at the local bank, which requires the preparation of proper financial statements. This means that BHA now will need to use the allowance method. The following transactions occur during 2021 and 2022. During 2021, install air conditioning systems on account, $172,000. During 2021, collect $167,000 from customers on account. At the end of 2021, estimate that uncollectible accounts total 20% of ending accounts receivable. In 2022, customers’ accounts totaling $6,200 are written off as uncollectible. 3. Calculate bad debt expense for 2021 and 2022 under the allowance method and under the direct write-off method, prior to any adjusting entries in 2022.

Answer 1

Bad debt expense under the allowance method:-

In 2021 =$5,840

In 2022 =$4,600

Bad debt expense under the direct write-off method:-

In 2021 = Nil

In 2022 = $6,200

Step-by-step explanation:

In 2021:

Opening Account Receivable = $24,200

Add: Sales in 2021 =$172,000

Less: Cash collected =$167,000

Closing Account Receivable =$29,200

Bad debt allowance = 20% (given in question)

Therefore bad debt expense in 2021 will be $5,840 ($29,200*20%).

In 2022:

Opening Account Receivable =$29,200

Less: Write-off receivable =$6,200

Closing Account Receivable =$23,000

Therefore bad debt expense in 2022 will be $4,600 ($23,000*20%)