Question

QS 9-6 Reporting allowance for doubtful accounts LO P2 On December 31 of Swift Co.’s first year, $54,000 of accounts receivable is not yet collected. Swift estimates that $2,400 of its accounts receivable is uncollectible and records the year-end adjusting entry. (1) Compute the realizable value of accounts receivable reported on Swift’s year-end balance sheet. (2) On January 1 of Swift’s second year, it writes off a customer’s account for $500. Compute the realizable value of accounts receivable on January 1 after the write-off.

Answer 1

(1) Computation of the realizable value of accounts receivable reported on Swift’s year-end balance sheet.

Accounts receivable $54,000 - Allowance for doubtful accounts $2,400 = $51,600

(2) On January 1 of Swift’s second year, the net realizable value of the accounts receivable remains the same.

Step-by-step explanation:

Net realizable value of accounts receivable is the amount that is realizable after deducting the allowance for doubtful accounts.

In scenario (1), $2,400 was estimated as uncollectible. Therefore, the following adjusting entries apply:

Debit Bad debt expense $2,400

Credit Allowance for doubtful accounts $2,400

(To record bad debt expense)

The net realizable of the accounts receivable is therefore: $54,000 - $2,4000 - $51,600

In scenario (2), the write-off of $500 only impacts the allowance for doubtful accounts and the accounts receivable, that is:

Debit Allowance for doubtful accounts $500

Credit Accounts receivable $500

(To write-off accounts receivable)

With the second adjusting entries, the net realizable value of accounts receivable remains the same.