SOLVED EXAMPLES ( ACCOUNTS RECEIVABLE & BAD DEBTS )

INCOME STATEMENT APPROACH

Q1. Star Company follows the income statement approach to estimating uncollectible account
expense. For several years the company has computed the charge to uncollectible accounts
expense as 1% of net sales. All sales are made on credit. The following data appeared in the
accounting records at Dec 31 2001, before adjustments.

Account Debit Credit

Sales $5,360,000
Sales Return & Allowances $200,000
Sales Discounts $160,000
Allowance for Doubtful Accounts $7,600

On January 12 2002, the company wrote off a $4,800 account receivable from John Brown,
which was determined to be uncollectible.

You are required to

(A) Prepare journal entries of the above transactions.
(B) Prepare adjusting entry to record the estimated uncollectible account expense at
December 31 2001 and the write off of the Brown receivable on Jan 12 2002. (5)

Answer 2
Net Sales Calculation 5,360,000-200,000-160,000
$ 5,000,000

(A)
Category Amount Value
1
Net Sales $ 5,000,000 % $ 50,000

Particulars DR CR
A/R $5,360,000
Sales $5,360,000

Sales Return $ 200,000

Sales Discount $ 160,000
A/R $ 360,000

(B)
Uncollectible Accounts Expense $ 50,000
Provision for Doubtful Debts $ 50,000

Provision for Doubtful Debts $ 4,800

A/R, John Brown $ 4,800
BALANCE SHEET APPROACH:
Q2. Hiawatha Corporation uses the balance sheet approach to estimate bad debts and maintains
an allowance account to reduce accounts receivable to realizable value. An analysis of the
account receivable on year-end produced the following age groups:

Category Amount
Not yet Due $162,000
1-30 days past due $90,000
31-60 days past due $39,000
61-90 days past due $9,000
Over 90 days past due $15,000
Total Accounts Receivable $315,000

In reliance upon its past experience with collections, the company estimated the percentages
probably uncollectible for the above five age groups as follows:

Category %
Not yet Due 1%
1-30 days past due 4%
31-60 days past due 10%
61-90 days past due 30%
Over 90 days past due 50%
Prior to adjustment at Dec 31 2001, the Allowance for Doubtful Accounts showed a credit balance
of $5,400.

You are required to:

a) Compute the estimate amount of uncollectible accounts based on the above classification by
age groups.(1)
b) Prepare the adjusting entry to bring the Allowance for Doubtful accounts to the proper
amount.(2)
c) Assume on January 10 of the following year, the Hiawatha Corporation learned that an
account receivable, which had originated on September 1 in the amount of $5,000 was
worthless because of the bankruptcy of the customer, Bart Company. Prepare the Journal
Entry required on Jan 10 to write off this account receivable. (2)
Answer 2
(A)

Category Amount Value

Not yet Due $ 162,000 1% $ 1,620
1-30 days past due $ 90,000 4% $ 3,600
31-60 days past due $ 39,000 10% $ 3,900
61-90 days past due $ 9,000 30% $ 2,700
Over 90 days past due $ 15,000 50% $ 7,500
Total Accounts
Receivable $ 315,000 $19,320

Old Balance $ 5,400

New Balance $ 19,320
Difference $ 13,920
DR CR
(B) Uncollectible Accounts Expense $13,920
Provision for Doubtful Debts $13,920

(C) Provision for Doubtful Debts $ 5,000

A/R, Bart Company $ 5,000