Answer:
- 3. Calculate bad debt expense for 2021 and 2022 under the allowance method and under the direct write-off method, prior to any adjusting entries.
- 2021
Under the Allowance Method
Dr Bad Debt Expense $ 5.960
Cr Allowance for Uncollectible Accounts $ 5.960
Under the Direct Write-Off Method
There aren't movements of writen-off accounts.
- 2022
In 2022, customers’ accounts totaling $6,800 are written off as uncollectible.
Under the Direct Write-Off Method
Dr Bad Debt Expense $ 6.800
Cr Accounts Receivable $ 6.800
Under the Allowance Method
3. Calculate bad debt expense for 2022 under the allowance method
Dr Bad Debt Expense $ 5.440
Cr Allowance for Uncollectible Accounts $ 5.440
Explanation:
- Initial Balance
Dr Accounts Receivable $ 24.800
- During 2021, install air conditioning systems on account
Dr Accounts Receivable $ 178.000
Cr Sales $ 178.000
- During 2021, collect $173,000 from customers on account.
Dr Cash $ 173.000
Cr Accounts Receivable $ 173.000
- 3. At the end of 2021, estimate that uncollectible accounts total 20% of ending accounts receivable.
Dr Bad Debt Expense $ 5.960
Cr Allowance for Uncollectible Accounts $ 5.960
- FINAL Balance 2021
Dr Accounts Receivable $ 29.800
Cr Allowance for Uncollectible Accounts $ 5.960
- 4. In 2022, customers’ accounts totaling $6,800 are written off as uncollectible. Under the Allowance Method
Dr Allowance for Uncollectible Accounts $ 6.800
Cr Accounts Receivable $ 6.800
- 4. In 2022, customers’ accounts totaling $6,800 are written off as uncollectible. Under the Direct Write-Off Method
Dr Bad Debt Expense $ 6.800
Cr Accounts Receivable $ 6.800
- Sub TOTAL Balance 2022
Dr Accounts Receivable $ 23.000
Dr Allowance for Uncollectible Accounts $ 840
- 3. Calculate bad debt expense for 2022 under the allowance method
Dr Bad Debt Expense $ 5.440
Cr Allowance for Uncollectible Accounts $ 5.440
- FINAL Balance 2022
Dr Accounts Receivable $ 23.000
Cr Allowance for Uncollectible Accounts $ 4.600
If the company applies the allowance method, it means that the account Allowance for Uncollectible Accounts must show as balance the % of accounts receivables as CREDIT.
Because the company has a debit balance in that account it's necessary to register an entry that compensate the DEBIT value and reflect A CREDIT estimated as % of account receivable.
Bad accounts are those credits granted by the company and there is no possibility of being charged.
When customers buy products on credits but the company cannot collect the debt, then it's necessary to cancel the unpaid invoice as uncollectible.
One way is to directly cancel bad debts at the time it was decided that the credit is bad, the total amount reported as bad debt expenses negatively affect the income statement and the accounts receivable are reduced by the same amount, less assets
The other way is to determine a percentage of the total amount of accounts receivable as bad debts, there are many ways to analyze accounts receivable and calculate the value of bad debts.
When the company has the percentage of uncollectible accounts, the required journal entry is Bad Expenses (debit) with Reserve for Bad Accounts (credit)
At the time of cancellation, since the expenses were recognized before, we only use the Allowance for Uncollectible Accounts (Debit) with accounts receivable (credit), with this we are recognizing the bad credit of the company.