Question

During 2012, Robby's Camera Shop had sales revenue of $170,000, of which $75,000 was on credit. At the start of 2012, Accounts Receivable showed a $16,000 debitbalance, and the allowance for Doubtful Accounts showed a $900 credit balance. Collections of accounts receivable during 2012 amounted to $60,000.
Data during 2012 follows:
a. On December 31, 2012, an Account Receivable (J. Doe) of $1,700 from a prior year was determined to be uncollectable; therefore, it was written off immediately as abad debt.
b. On December 31, 2012, on the basis of experience, a decision was made to continue the accounting policy of basing estimated bad debt losses on 1.5 percent of creditsales for the year.
REQUIRED:
1. Give the required journal entries for the two items on December 31, 2012 (end of the accounting period).
2. Show how the amounts related to Accounts Recievable and Bad Debt Expense would be reported on the income statement and balance sheet for 2012. Disregard income taxconsiderations.
3. On the basis of the data available, does the 1.5 percent rate appear to be reasonable? Explain

Answer 1

Answer:

1) December 31, 2012, bad debt write off

Dr Bad debt expense 1,700

    Cr Accounts receivable 1,700

December 31, 2012

Dr Bad debt expense 1,125

    Cr Allowance for doubtful accounts 1,125

2) Bad debt expense must be recorded in the income statement and it reduces net income. Both transactions reduce net accounts receivable on the balance sheet.

3) It doesn't seem to be appropriate because just one bad account (J. Doe) was higher than 1.5%. A large % of accounts receivable is still outstanding (= $27,275 / $75,000 = 36.4%) and they should include approximately four months of credit sales. This means that unless the company issues a very long credit, a much larger percent is past due.

Explanation:

net accounts receivable January 1, 2012 = $15,100

credit sales 2012 = $75,000

collections on accounts receivable $60,000

net accounts receivable December 31 = $15,100 + $75,000 - $60,000 - $1,700 - $1,125 = $27,275