Question

During the year ended December 31, 2009, Kelly’s Camera Shop had sales revenue of $170,000, of which $85,000 was on credit. At the start of 2009, Accounts Receivable showed a $10,000 debit balance, and the Allowance for Doubtful Accounts showed an $800 credit balance. Collections of accounts receivable during 2009 amounted to $68,000.
Data during 2009 follow:

a. On December 10, a customer balance of $1,500 from a prior year was determined to be uncollectible, so it was written off.
b. 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:
1. Give the required journal entries for the two events in December 2009.
2. Show how the amounts related to Accounts Receivable and Bad Debt Expense would be reported on the balance sheet and income statement for 2009.
3. On the basis of the data available, does the 2 percent rate appear to be reasonable? Explain.

Answer 1

Answer:

allowance for Doubtful Accounts 1,500 debit

        accounts receivables               1,500 credit

bad debt expense           1,700 debit

    allowance for Doubtful Accounts 1,700 credit

Balance Sheet:

Account receivables 25,500

Allowance for Doubtful Account 1,000

3.- Yes, as the amount of write-off account was pretty similar to our estimated amount.

Explanation:

estimated bad debt expense:

85,000 x 2% = 1,700

A/R

Beginning balance 10,000 + 85,000 credit sales - 68,000 collected - 1,500 write-off = 25,500

AllowancE: 800 - 1,500 write-off + 1.700 bad debt expense = 1,000

Answer 2

Answer:

1. Dec.10Dr Allowance for doubtful accounts$ 1,500

Cr Accounts Receivable $ 1,500

Dr Dec.31Bad Debts Expenses $ 1,700

Cr Allowance for doubtful accounts $ 1,700

2.$24,500

3. No

Explanation:

Journal entries

1.

Dec.10

Dr Allowance for doubtful accounts$ 1,500

Cr Accounts Receivable $ 1,500

Dr Dec.31 Bad Debts Expenses (85000*2%) $ 1,700

Cr Allowance for doubtful accounts $ 1,700

2) Balance Sheet (Partial)

Current Assets:

Account Receivable

($10,000+$85,000-$68,000-$1500)$ 25,500

Less : Allowance for doubtful accounts (800-1500+1700) $1000

Net Realizable Value $ 24,500

Balance Sheet (Partial)

Operating Expenses:

Bad debts Expenses $ 1,700

3) 2% Rate does not appear to be reasonable.