Question

At December 31, 2010, Aaliyah Company reports the following results for its calendar year.

Cash sales........... $1905,000
Credit sales......... 5682000

In addition, its unadjusted trial balance includes the following items

Accounts receivable $1,270,100 debit
Allowance for doubtful accounts 16,580 debit


Required
1. Prepare the adjusting entry for Aaliyah Co. to recognize bad debts under each of the following independent assumptions:
a. Bad debts are estimated to be 1.5% of credit sales.
b. Bad debts are estimated to be 1% of total sales.
c. An aging analysis estimates that 5% of year-end accounts receivable are uncollectible.

2. Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on its December 31, 2010, balance sheet assuming that an aging analysis estimates that 5% of year-end accounts receivable are uncollectible.

Answer 1

1.

Debit Credit

31-Dec-10

(a) Bad debt Expense A/c 85,230

To Allowance for Doubtful Accounts A/c 85,230

(b) Bad debt Expense A/c 75,870

To Allowance for Doubtful Accounts A/c 75,870

(c) Bad debt Expense A/c 80,085

To Allowance for Doubtful Accounts A/c 80,085

2.

Current Assets Amount in $ Amount in $

Account Receivables 1,270,100

Less: Allowance for doubtful accounts -85,230 1,184,870

Step-by-step explanation:

1. In order to prepare the adjusting entry we would have to make the following calculations:

(a) Bad debts estimated =1.5% on Credit sales =$5682,000 *1.5% =$85,230 (b) Bad debts estimated =1% on Total sales =($5682,000 +$ 1905,000) *1% =$75,870

(c ) Bad debts estimated =5% on year end receivables + Debit Balance =5% *1270100 +16580 =$80085

Debit Credit

31-Dec-10

(a) Bad debt Expense A/c 85,230

To Allowance for Doubtful Accounts A/c 85,230

(b) Bad debt Expense A/c 75,870

To Allowance for Doubtful Accounts A/c 75,870

(c) Bad debt Expense A/c 80,085

To Allowance for Doubtful Accounts A/c 80,085

2. Accounts Receivable and the Allowance for Doubtful Accounts appear on its December 31, 2010, balance sheet as follows:

Current Assets Amount in $ Amount in $

Account Receivables 1,270,100

Less: Allowance for doubtful accounts -85,230 1,184,870