Question

At year-end (December 31), Chan Company estimates its bad debts as 0.70% of its annual credit sales of $862,000. Chan records its Bad Debts Expense for that estimate. On the following February 1, Chan decides that the $431 account of P. Park is uncollectible and writes it off as a bad debt. On June 5, Park unexpectedly pays the amount previously written off. Prepare Chan's journal entries for the transactions.

Answer 1

Answer:

1. Debit Bad debt expense  $6,034

Credit Allowance for doubtful debt  $6,034

Being entries to record bad debt estimates as at 31 December

2. Debit  Allowance for doubtful debt $431

    Credit Accounts receivable   $431

Being entries to write of receivable due from P. Park on February 1.

3. Debit Cash account $431

   Credit Bad debt expense  $431

Being entries to recognize cash received from debt previously written off.

Explanation:

When a company makes sales on account, debit accounts receivable and credit sales. Based on assessment, some or all of the receivables may be uncollectible.  

To account for this, debit bad debit expense and credit allowance for doubtful debt. Should the debt become uncollectible (i.e go bad), debit allowance for doubtful debt and credit accounts receivable.

Where a debit that had previously been determined to have gone bad gets settled, debit cash and credit Bad debts expense.

Bade debts

= 0.70% * $862,000

= $6,034

Answer 2

Answer: Please see the required journals below:

December 31:

Debit Bad debt expense                                $6,034

Credit Allowance for doubtful accounts       $6,034

February 1:

Debit Allowance for doubtful accounts              $431

Credit Accounts receivables                               $431

June 5:

Debit Cash                                                            $431

Credit Bad debt recovery (income statement)   $431

Explanation: The company estimates its bad debt expense as percentage of sales. In this case 0.7% of its annual sales of $862,000 was deemed as uncollectible, that is, 0.7% x $862,000 = $6,034. The required journals to recognize this bad debt expense is provided above. However, since there was an existing provision, which resides in the allowance account, a write-off would definitely hit that account in order to extinguish the accounts receivable portion. Upon recovery of the write-off, we cannot reinstate the receivable since it was already extinguished but we need to recognize the recovery as a gain.