Question

Renue Spa had the following balances at December 31, Year 1: Cash of $12,000, Accounts Receivable of $88,000, Allowance for Doubtful Accounts of $2,100, and Retained Earnings of $97,900. During Year 3, $2,100 of accounts receivable were written off as uncollectible. In addition, Renue unexpectedly collected $170 of receivables that had been written off in a previous accounting period. Services provided on account during Year 3 were $221,000, and cash collections from receivables were $223,028. Uncollectible accounts expense was estimated to be 1 percent of the sales on account for the period. Required a. Organize the information in accounts under an accounting equation. b. Based on the preceding information, compute (after year-end adjustment): 1. (1) Balance of Allowance for Doubtful Accounts at December 31, Year 3. 2. (2) Balance of Accounts Receivable at December 31, Year 3. 3. (3) Net realizable value of Accounts Receivable at December 31, Year 3. c. What amount of uncollectible accounts expense will Renue Spa have for Year 3?

Answer 1

a. Organize the information in accounts under an accounting equation

The accounting equation is: Cash of $235,198 + Accounts Receivable of $83,872 - Allowance for Doubtful Accounts of $2,210 = Retained Earnings of $316,860

b. (1) Balance of Allowance for Doubtful Accounts at December 31, Year 3 is $2,210

(2) Balance of Accounts Receivable at December 31, Year 3 is $83,872

(3) Net realizable value of Accounts Receivable at December 31, Year 3 is $81,662

c. The amount of uncollectible accounts expense will Renue Spa have for Year 3 is $2,040 recorded as:

Debit Bad debt expense $2,040

Credit Allowance for doubtful accounts $2,040

(To record bad debt expense)

Step-by-step explanation:

Effects of the transactions in journals are as follows:

Debit Allowance for doubtful accounts $2,100

Credit Accounts receivable $2,100

(To write-off uncollectible accounts receivable)

Debit Accounts receivable $170

Credit Allowance for doubtful accounts $170

(To re-establish previously written-off accounts receivable)

Debit Cash $170

Credit Accounts receivable $170

(To record collections on accounts previously written-off)

Debit Accounts receivable $221,000

Credit Sales revenue $221,000

(To record revenue from service rendered)

Debit Cash $223,028

Credit Accounts receivable $223,028

(To record collections on accounts)

• Accounting equation shows a company's balance sheet - in that the total assets of a company equals liabilities and equity. At the instance of this question, the accounting equation prior to the adjustments is: Cash of $12,000 + Accounts Receivable of $88,000 - Allowance for Doubtful Accounts of $2,100 = Retained Earnings of $97,900
• The effects of the journals above on the equation are: Cash of $12,000 + $170 + $223,028 + Accounts Receivable of $88,000 - $2,100 + $170 - $170 + $221,000 - $223,028 - Allowance for Doubtful Accounts of $2,100 - $2,100 + $170 = Retained Earnings of $97,900
• 1% of $221,000 (sales on account) = $2,210. The required bad debt expense is $2,210 - $170 = $2,040

• Net realizable value of accounts receivable is: $83,872 - $2,210 = $81,662

• Therefore, final accounting equation is: Cash of $235,198 + Accounts Receivable of $83,872 - Allowance for Doubtful Accounts of $2,210 = Retained Earnings of $316,860