Question

Dhaliwal Digital categorizes its accounts receivable into three age groups for purposes of estimating its allowance for uncollectible accounts. Accounts not yet due = $104,000; estimated uncollectible = 15%. Accounts 1–45 days past due = $14,400; estimated uncollectible = 20%. Accounts more than 45 days past due = $5,700; estimated uncollectible = 25%. Before recording any adjustments, Dhaliwal has a debit balance of $25,700 in its allowance for uncollectible accounts. Required: 1. Estimate the appropriate 12/31/2021 balance for Dhaliwal’s allowance for uncollectible accounts. 2. What journal entry should Dhaliwal record to adjust its allowance for uncollectible accounts?

Answer 1

Dhaliwal Digital's estimated allowance for uncollectible accounts as of 12/31/2021 is $19,905, calculated individually for each age group. The company needs to adjust down its existing allowance by recording a $5,795 debit to Applyance for Uncollectible Accounts and a corresponding credit to Bad Debt Expense.

Step-by-step explanation:

Estimation of Allowance for Uncollectible Accounts

To estimate the appropriate balance for Dhaliwal’s allowance for uncollectible accounts as of 12/31/2021, we must first calculate the estimated uncollectibles for each age group of accounts receivable and then adjust the existing allowance balance accordingly.

The calculations are as follows:

• 
  
• Accounts not yet due: $104,000 × 15% = $15,600
• 
  
• Accounts 1–45 days past due: $14,400 × 20% = $2,880
• 
  
• Accounts more than 45 days past due: $5,700 × 25% = $1,425

Add these estimated uncollectible amounts to obtain the total estimated uncollectible accounts:

$15,600 (not yet due) + $2,880 (1–45 days) + $1,425 (more than 45 days) = $19,905

The existing allowance balance is a debit of $25,700, which means the company has overstated its recoverable accounts. To adjust the allowance to the estimated amount, Dhaliwal would need to record a journal entry that reduces the allowance by $5,795:

The journal entry on 12/31/2021 would be:

• 
  
• Debit: Allowance for Uncollectible Accounts $5,795
• 
  
• Credit: Bad Debt Expense $5,795

This entry decreases the allowance account balance to the new estimated balance of $19,905.

Answer 2

1. Estimate the appropriate 12/31/2021 balance for Dhaliwal’s allowance for uncollectible accounts.

$19,905 credit balance

2. What journal entry should Dhaliwal record to adjust its allowance for uncollectible accounts?

December 31, 202x, adjustment of bad debt expense

Dr Bad debt expense 45,605

Cr Allowance for uncollectible accounts 45,605

= $19,905 + $25,700 = $45,605

Step-by-step explanation:

Accounts not yet due = $104,000; estimated uncollectible = 15%. ⇒ bad debt = $104,000 x 15% = $15,600

Accounts 1–45 days past due = $14,400; estimated uncollectible = 20%. bad debt = $14,400 x 20% = $2,880

Accounts more than 45 days past due = $5,700; estimated uncollectible = 25%. bad debt = $5,700 x 25% = $1,425

total bad debt expense = $15,600 + $2,880 + $1,425 = $19,905