Question

The following information is from the 2019 records of Fast Lane Racing​ Gear: Accounts​ receivable, December​ 31, 2019 $ 41 comma 000​ (debit) Allowance for Bad​ Debts, December​ 31, 2019 prior to adjustment 1 comma 700​ (debit) Net credit sales for 2019 177 comma 000 Accounts written off as uncollectible during 2019 17 comma 000 Cash sales during 2019 32 comma 000 Bad debts expense is estimated by the agingminusofminusreceivables method. Management estimates that $ 8 comma 000 of accounts receivable will be uncollectible. Calculate the ending balance of Allowance for Bad​ Debts, after the adjustment for bad debts​ expense, at December​ 31, 2019.

Answer 1

Answer:

Calculate the ending balance of Allowance for Bad​ Debts, after the adjustment for bad debts​ expense, at December​ 31, 2019.

Dr Bad Debt Expense $ 9,700

Cr Allowance for Uncollectible Accounts $ 9,700

Explanation:

• December​ 31, 2019  

Dr Accounts Receivable  $ 41,000

• Prior to adjustment  

Dr Allowance for Bad​ Debts $ 1,700

• Net credit sales for 2019  

Credits Sales $ 177,000

• Management estimates that $ 8 comma 000 of accounts receivable will be uncollectible.  

Dr Bad Debt Expense $ 9,700

Cr Allowance for Uncollectible Accounts $ 9,700

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.

• FINAL Balance  

Dr Accounts Receivable  $ 41,000

Cr Allowance for Uncollectible Accounts $ 9,700

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.