Question

At the beginning of 2021, Brad’s Heating & Air (BHA) has a balance of $24,800 in accounts receivable. Because BHA is a privately owned company, the company has used only the direct write-off method to account for uncollectible accounts. However, at the end of 2021, BHA wishes to obtain a loan at the local bank, which requires the preparation of proper financial statements. This means that BHA now will need to use the allowance method. The following transactions occur during 2021 and 2022. 1. During 2021, install air conditioning systems on account, $178,000. 2. During 2021, collect $173,000 from customers on account. 3. At the end of 2021, estimate that uncollectible accounts total 20% of ending accounts receivable. 4. In 2022, customers’ accounts totaling $6,800 are written off as uncollectible. 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. (Leave no cells blank.)

Answer 1

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.