Question

The balance sheet of Starsky Company at January 1, 2019, includes the following. Accounts receivable 500,000 Less: Allowance for doubtful accounts (40,000) $460,000 Transactions in 2019 include the following. 1. Sales on credit for the year were $1,000,000. (all service revenue) 2. Accounts receivable of $870,000 were collected. 3. Customer accounts of $42,000 were written off during the year. 4. At year-end, bad debts were estimated to be 4% of the ending A/R balance (based on the % of A/R method). Make sure to update the A/R and Allowance balance for the transactions above before calculating bad debt expense. Prepare all journal entries necessary to reflect the transactions above.

Answer 1

The required journal entries are as follows:

Debit Accounts receivable $1,000,000

Credit Sales revenue $1,000,000

(To record sales transactions on credit)

Debit Cash $870,000

Credit Accounts receivable $870,000

(To record collection of accounts receivable)

Debit Allowance for doubtful accounts $42,000

Credit Accounts receivable $42,000

(Write-off of accounts receivable)

Debit Bad debt expense ($2,000 + $23,520) $25,520

Credit Allowance for doubtful accounts $25,520

(Recognition of bad debt expense for the year)

Step-by-step explanation:

• The sales on credit is an addition to accounts receivable since everything was on credit. Collection during the year would definitely reduce the accounts receivable balance, same with the write-off. Therefore, the balance in accounts receivable will be: $500,000 + $1,000,000 - $870,000 - $42,000 = $588,000. 4% of $588,000 is $23,520.
• Allowance for doubtful accounts had an opening balance of $40,000. The write-off during the year would reduce this balance and throw it into a debit of $2,000. Therefore, balance in the allowance account before adjustment is $2,000 debit. To reinstate this to what the estimated bad debt expense should be, we have to add $2,000 to $23,520 to arrive at $25,520.