Question

During the year ended December 31, 2018, Kelly’s Camera Shop had sales revenue of $170,000, of which $85,000 was on credit. At the start of 2018, Accounts Receivable showed a $10,000 debit balance and the Allowance for Doubtful Accounts showed a $600 credit balance. Collections of accounts receivable during 2018 amounted to $68,000. Data during 2018 follow: On December 10, a customer balance of $1,500 from a prior year was determined to be uncollectible, so it was written off. On December 31, a decision was made to continue the accounting policy of basing estimated bad debt losses on 2 percent of credit sales for the year. Required: Give the required journal entries for the two events in December. Show how the amounts related to Accounts Receivable and Bad Debt Expense would be reported on the balance sheet and income statement for 2018. On the basis of the data available, does the 2 percent rate appear to be reasonable?

Answer 1

Answer:

The required journals are:

Debit Cash ($170,000 - $85,000)            $85,000

Debit Accounts receivable                       $85,000

Credit Sales revenue                               $170,000

(To record sales transactions during the year)

Debit Cash                                                $68,000

Credit Accounts receivable                     $68,000

(To record collections on account)

Debit Allowance for doubtful accounts     $1,500

Credit Accounts receivable                        $1,500

(To write-off uncollectible accounts receivable)

Debit Bad debt expense                            $2,600

Credit Allowance for doubtful accounts   $2,600

(To record the bad debt expense for the year)

• Bad debt expense to be reported in the income statement is $2,600 while $25,500 will be the balance in accounts receivable (balance sheet).
• 2% does not appear reasonable as proven by the write-off that happened during the year with insufficient buffer in the allowance for doubtful accounts and also considering the volume of transactions and collectibility.

Explanation:

• The credit sales transactions will be an addition to accounts receivable while the collections during the year will reduce the accounts receivable though it is increasing cash balance. The write-off will also reduce the accounts receivable. So the balance in accounts receivable will be: $$10,000 + $85,000 - $68,000 - $1,500 = $25,500.
• Allowance for doubtful accounts had an opening balance of $600. The write-off of $1,500 will throw it into a debit balance of $900 before the adjustments. 2% of credit sales ($85,000) is $1,700. The debit balance of $900 will be added to the $1,700 to arrive at $2,600.
• The 2% does not appear reasonable based on the above (Answer section).