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Raintree Cosmetic Company sells its products to customers on a credit basis
Raintree Cosmetic Company sells its products to customers on a credit basis. An adjusting entry for bad debt expense is recorded only at December 31, the company’s fiscal year-end. The 2017 balance sheet disclosed the following:
| Current assets: | ||||||
| Receivables, net of allowance for uncollectible accounts of $30,000 | $432,000 | |||||
During 2018, credit sales were $1,750,000, cash collections from customers $1,830,000, and $35,000 in accounts receivable were written off. In addition, $3,000 was collected from a customer whose account was written off in 2017. An aging of accounts receivable at December 31, 2018, reveals the following:
| Percentage of Year-End | Percent | ||||
| Age Group | Receivables in Group | Uncollectible | |||
| 0–60 days | 65 | % | 4 | % | |
| 61–90 days | 20 | 15 | |||
| 91–120 days | 10 | 25 | |||
| Over 120 days | 5 | 40 | |||
Required:
1. Prepare summary journal entries to account for the 2018 write-offs and the collection of the receivable previously written off.
2. Prepare the year-end adjusting entry for bad debts according to each of the following situations:
Bad debt expense is estimated to be 3% of credit sales for the year.
Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable.
Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is determined by an aging of accounts receivable.
3. For situations (a)–(c) in requirement 2 above, what would be the net amount of accounts receivable reported in the 2018 balance sheet?
Expert Solution
Solution 1:
| Journal Entry 1 - Raintree Cosmetic Company | |||
| Event | Particulars | Debit | Credit |
| 1 | Allowance for doubtful accounts Dr | $35,000.00 | |
| To Accounts receivables | $35,000.00 | ||
| (To written of accounts receivables) | |||
| 2 | Accounts receivables Dr | $3,000.00 | |
| To Allowance for doubtful accounts | $3,000.00 | ||
| (To reinstate account previously written off) | |||
| 3 | Cash Dr | $3,000.00 | |
| To Accounts receivables | $3,000.00 | ||
| (To record collection of accounts previously written off) | |||
Solution 2:
Balance in accounts receivable on 31.12.2018 = Beginning receivables + credit sales - collection - Written off
= $462,000 + $1,750,000 - $1,830,000 - $35,000 = $347,000
Unadjusted balance of allowance for uncollectible accounts = Beginning balance - Written off + Recovery of bad debts previously written off
= $30,000 - $35,000 + $3,000 = $2,000 debit
| Computation of Allowance for Uncollectible Accounts | ||||
| Ageing | % of year end receivables in Group | Accounts Receivables | % Uncollectible | Required Allowance |
| 0-60 days | 65% | $225,550.00 | 4% | $9,022.00 |
| 61-90 days | 20% | $69,400.00 | 15% | $10,410.00 |
| 91-120 days | 10% | $34,700.00 | 25% | $8,675.00 |
| Over 120 days | 5% | $17,350.00 | 40% | $6,940.00 |
| Total | $347,000.00 | $35,047.00 | ||
| Journal Entry 2 - Raintree Cosmetic Company | |||
| Event | Particulars | Debit | Credit |
| a | Bad debts Expense Dr ($1,750,000*3%) | $52,500.00 | |
| To Allowance for doubtful accounts | $52,500.00 | ||
| (To record bad debts expense) | |||
| b | Bad debts Expense Dr ($347,000*10% + $2,000) | $36,700.00 | |
| To Allowance for doubtful accounts | $36,700.00 | ||
| (To record bad debts expense) | |||
| c | Bad debts Expense Dr ($35,047 + $2,000) | $37,047.00 | |
| To Allowance for doubtful accounts | $37,047.00 | ||
| (To record bad debts expense) | |||
Solution 3:
Net amount of accounts receivables reported in the 2018 balance sheet:
Situation a: Bad debts on the basis of % of credit sales
= Gross receivables - Ending balance of allowance for uncollectilble accounts = $347,000 - $50,500 = $296,500
Situation b: Bad debts on the basis of % of ending receivables
= Gross receivables - Ending balance of allowance for uncollectilble accounts = $347,000 - $34,700 = $312,300
Situation c: Bad debts on the basis of aging of accounts receivables
= Gross receivables - Ending balance of allowance for uncollectilble accounts = $347,000 - $35,047 = $311,953
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