Question

amounts and P8.4B (LO 2) AP Information for Jager Company in 2021 follows: Total net credit sales Accounts receivable at December 31 Accounts receivable written off Amount collected on accounts previously written off (after write off but before year end) $3,300,000 1.250,000 48,000 8,000 Instructions a. Assume that Jager Company decides to use the allowance method and estimates its uncollectible ac counts to be $52,000 based on an aging schedule. What amount of bad debt expense will Jager record if Allowance for Doubtful Accounts had an opening credit balance of $30,000 on January 1, 20217 b. Assume the same facts as in part (a), except that the Allowance for Doubtful Accounts had a $42.250 credit balance on January 1, 2021. What amount of bad debt expense will Jager record on December 31, 2021? c. Assume instead that Jager Company decides to estimate its uncollectible accounts using 1.5% of net credit sales. What amount of bad debt expense will Jager record if Allowance for D had an opening credit balance of $30,000 on January 1, 2021? d. How does the amount of accounts written off during the period affect the amount of bad debt expense recorded at the end of the period when using the percentage of receivables approach? e. How does the collection of an account that had previously been written off affect the carrying amount of accounts receivable? Taking it Further Why can a company not be certain what accounts are not collectible?

Answer 1

Ans. - (a) :-

• Here, Accounts receivables written off = $48,000
  • Amount collected from previously written off accounts = $8000
  • Opening balance of Allowance for Doubtful accounts = $30,000

• To record amount collected from accounts previously written off, Entry would be :

Accounts receivables a/c Dr. $8000 -

To Allowance for doubtful accounts - $8000

Bank/Cash a/c Dr. $8000 -  

To Accounts receivables - $8000

• Now, Balance of Allowance for Doubtful accounts = $30,000 + $8000 = $38,000

• To write off accounts receivable of $48,000 , entry would be :

Allowance for Doubtful accounts Dr. $38,000 -

Bad debts Account [48,000 - 38000] Dr. $10,000 -

To Accounts receivables a/c - $48,000

• Assuming Jager company estimates uncollectible accounts to be $52,000 , entry would be:

Bad Debts Account Dr. $52,000 -

To Allowance for Doubtful accounts - $52,000

• Hence, total amount of Bad debts expense = $52,000 + $10,000 = $62,000

Ans. - (b) :-

• Assuming that opening balance of Allowance for doubtful accounts = $42,250

• To record amount collected from accounts previously written off, Entry would be :

Accounts receivables a/c Dr. $8000 -

To Allowance for doubtful accounts - $8000

Bank/Cash a/c Dr. $8000 -  

To Accounts receivables - $8000

• Now, Balance of Allowance for Doubtful accounts = $42,250 + $8000 = $50,250

• To write off accounts receivable of $48,000 , entry would be :

Allowance for Doubtful accounts Dr. $48,000 -

To Accounts receivables a/c - $48,000

• Now, Balance of Allowance for Doubtful accounts = $50,250 - $48,000 = $2,250

• Estimated amount of Uncollectible accounts = $52,000
• Hence, Bad debts expense to be recorded = $52,000 - $2,250 = $49,750

Ans. - (c) :- If Jager company decides to estimate uncollectible accounts based on 1.5% of credit sales :-

• In this approach, balance in the allowance for doubtful accounts would be irrelevant, as we have to make provision for doubtful debts every year for an amount equal to 1.5 % of the credit sales during the year.
• Hence, 1.5% of $3,300,000 = $49,500
• Entry would be :

Bad debts expense Dr. $49,500 -

To Allowance for doubtful accounts - $49,500

Ans. - (d) :-

• Under percentage of receivables method, amount of accounts written off during the year does not affect the Bad debts expense to be recorded at the end of the year.
• This is so because in this approach, we have to record bad debt expense for every year based on the fixed percentage, irrespective of the balance in the Allowance account.