Question

Michael’s Bookshelf specializes in used, rare, and out-of-print books. The store has a large base of repeat customers who purchase books on 30-day accounts. At 15 days overdue, each customer gets a phone call from Michael requesting payment. Michael has experienced a high success rate with this collection effort. Michael’s CPA is preparing year-end financial statements and has asked him for his estimate of uncollectible accounts. Michael has a balance of $65,000 in the Accounts Receivable account at the end of the year. He has analyzed his uncollectible accounts using an aging of the accounts receivable. He estimates that only 2.5 percent of his accounts receivable balance will not be collected. The Allowance for Doubtful Accounts has a credit balance of $210 in the trial balance.

Required:
a. Prepare the journal entry to record the bad debt expense at year end.
b. Show the balance sheet presentation of the receivable account.
c. What is the amount of bad debt expense that appears on the income statement? How is this amount classified?
d. What would be the justification, if any, for Michael to use the direct write-off method for accounting for uncollectible accounts?

Answer 1

A. Dr Bad Debt Expense 1,415

CrAllowance for Doubtful Accounts 1,415

B. $63,375

C. $1,415

The bad debt amount of 1,415 will be written in

income statement below selling expenses because the amount is an operating expense amount.

D. The justification is that In a situation where the amount is said to be immaterial to total sales amount he may decide not to record the bad debt amount using the allowance method.

Step-by-step explanation:

A. Preparation of the journal entry to record the bad debt expense

Dr Bad Debt Expense 1,415

CrAllowance for Doubtful Accounts 1,415

[(2.5%*65,000)-210]

=1,625-210

=1,415

(To record estimated uncollectible accounts)

B. The balance sheet presentation of the receivable account will be :

CURRENT ASSSETS

Accounts Receivable $65,000

Less: Allowance for Uncollectible Accounts 1,625 (2.5%*65,000)

Receivable account $63,375

C.The amount of bad debt expense that will appears on the income statement is 1,415

Calculated as :

Bad debt=[(2.5%*65,000)-210]

Bad debt =1,625-210

Bad debt =1,415

B.The amount of bad debt expense that will appears on the income statement is 1,415

Calculated as :

Bad debt=[(2.5%*65,000)-210]

Bad debt =1,625-210

Bad debt =1,415

The bad debt amount of 1,415 will be written in

income statement below selling expenses because the amount is an operating expense amount.

D. Based on the information given Michael’s bad debts percentage is 2.5 percent of his accounts receivable balance which means that in a situation where the amount is said to be immaterial to total sales amount he may decide not to record the bad debt amount using the allowance method.