Question

Fraud Investigators Inc. operates a fraud detection service.

Answer 1

Answer:

Fraud Investigators Inc.

Date              Particulars                   Debit                  Credit

31 Mar       Accounts Receivable     $ 17,000

                                  Service Revenue                  $ 17000

On March 31, 10 customers were billed for detection services totaling $17,000

31 October  Bad Debts             $1100 Dr.

                      Allowance for Doubtful Debts              $ 1100 Cr

When  Allowance for Doubtful Debts is created .      

At the year end this adjusting entry would be passed . This is an adjusting entry and is not passed on 31st October. It is recorded on the year end.

               Allowance for Doubtful Debts              $ 1100 Dr.

                  Accounts Receivable                     $ 1100 Cr

Dec 15     Allowance for Doubtful Debts              $ 720 Dr

                           Bad Debts                          $ 720 Cr

Recovery Of Bad Debts

Dec 31   Bad debts          $ 420 Dr

               Allowance for Doubtful Debts $ 420 Cr

On December 31, $420 of bad debts were estimated and recorded for the year

Answer 2

Answer:

Fraud Investigators Inc.

Journal entries

Mar 31.

Debit Accounts Receivable Account with $17,000

Credit Revenue with $17,000

(Being Revenue on detection service in 10 clients sites)

October 31

Debit Bad debt Account with $1,100

Credit Accounts Receivables Account with $1,100

(Being Bad debts on Prior periods Payables balance not recoverable & written off)

December 15

Debit Cash $720

Credit Bad debt recovered Account with $720

(Being bad debt previously written off in prior years now recovered)

December 31

Debit Bad debts Account with $420

Credit Bad debts Provision Account with $420

(Being provision of Bad debt based on Accounts Receivable balance at year end)

Explanation:

Bad debt are Accounting provisions made with respect to the Accounts receivable Balance and the Ageing of these Balances.

The older a debt is, the more likely customers will default. For this reason and considering the Prudence concepts firms are expected to appraise their Receivables position and make provisions for bad debts.

Fraud Investigators Inc.

Journal entries

Mar 31.

Debit Accounts Receivable Account with $17,000

Credit Revenue with $17,000

(Being Revenue on detection service in 10 clients sites)

October 31

Debit Bad debt Account with $1,100

Credit Accounts Receivables Account with $1,100

(Being Bad debts on Prior periods Payables balance not recoverable & written off)

December 15

Debit Cash $720

Credit Bad debt recovered Account with $720

(Being bad debt previously written off in prior years now recovered)

December 31

Debit Bad debts Account with $420

Credit Bad debts Provision Account with $420

(Being provision of Bad debt based on Accounts Receivable balance at year end)