Question

1. On December 31, 2016, Royal Corporation had the following account balances relate receivables prior to recording adjusting entries: e following account balances related to credit sales and Accounts receivable $25,000 Allowance for doubtful accounts 800 (credit) Sales revenues (all sales were on-account) 400,000 As the first step in the adjustments process, Royal decided that it will no longer attempt to collect a $500 balance owed to it by Regional Inc. and will write off this balance. Requirements: A. Present the journal entry that Royal Corporation would record to write off the Regional Inc. accounts receivable balance on 12/31/16. Then, show the balances in the general ledger (use T accounts) for the three accounts listed above after the adjustment has been recorded. (4) B. Present the necessary year-end adjusting entry, after the Write-off of Regional Inc.'s balance has been recorded, related to uncollectible accounts for each of the following independent assumptions (use the method corresponding to each assumption): B1. An aging of accounts receivable is completed. It is estimated that $2,150 of the receivables outstanding will be uncollectible. (3) B2. It is estimated that 1% of credit sales for the year will prove to be uncollectible. (3) B3. Assume the same information presented in part B1 except that the allowance for doubtful accounts had a debit balance of $200 rather than the one you calculated in part A after writing off the Regional Inc. receivable. (2) C. Assume Royal Corporation is subject to a 30% income tax and uses alternative B2 above. C1. If Royal decides to reduce its 1% estimate to 0.5% of credit sales, by how much will this increase/decrease 2016 net income? (4) C2. If Royal decides to reduce its 1% estimate to 0.5% of credit sales, which accounts in the 12/31/16 balance sheet would be impacted and by how much? (4)

Answer 1

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Royal Corporation
Answer A
Journal Entry
Account	Debit ($)	Credit ($)
Allowance for Doubtful Accounts	500.00
Accounts Receivable		500.00
(being Accounts Receivable of Regional Inc. is uncollectible and written off)

T accounts
Accounts Receivable Account
Account	Debit $	Account	Credit $
Opening balance	25,000.00	Allowance for uncollectible account	500.00
		Closing balance	24,500.00
	25,000.00		25,000.00
Opening balance	24,500.00
Allowance for Bad Debt account
Account	Debit $	Account	Credit $
Accounts Receivable	500.00	Opening balance	800.00
Closing balance	300.00
	800.00		800.00
		Opening balance	300.00
Sales account
Account	Debit $	Account	Credit $
Closing balance	400,000.00	Accounts Receivable	400,000.00
	400,000.00		400,000.00

Answer B 1
Bad debt expense at year end:		Note
Opening Allowance for Doubtful Accounts	800.00	A
Written off	500.00	B
Unadjusted balance In allowance for Bad Debt accounts	300.00	C= A-B
Allowance for Bad Debt accounts as at 31st December	2,150.00	D
Bad debt expense for September:	1,850.00	E=D-C
Adjusting Entry
Account	Debit ($)	Credit ($)
Bad debt Expense	1,850.00
Allowance for Doubtful Accounts		1,850.00

Answer B 2		Note
Credit sale for 2016	400,000.00	F
Allowance for doubtful accounts %	1%	G
Allowance for doubtful accounts	4,000.00	H=F*G
Calculation of Bad debt expense for 2016:		Note
Opening balance In allowance for Bad Debt accounts	800.00	A
Accounts receivable written off	500.00	B
Unadjusted balance In allowance for Bad Debt accounts	300.00	C= A-B
Allowance for Bad Debt accounts at the end of September	4,000.00	See H
Bad debt expense for 2016:	3,700.00	I=H-C
Adjusting Entry
Account	Debit ($)	Credit ($)
Bad debt Expense	3,700.00
Allowance for Doubtful Accounts		3,700.00

Answer B 3
Bad debt expense at year end:		Note
Unadjusted balance In allowance for Bad Debt accounts	(200.00)	J
Allowance for Bad Debt accounts as at 31st December	2,150.00	K
Bad debt expense for September:	2,350.00	L=K-J
Adjusting Entry
Account	Debit ($)	Credit ($)
Bad debt Expense	2,350.00
Allowance for Doubtful Accounts		2,350.00

Answer C 1
If Allowance for doubtful accounts is 1 %			If Allowance for doubtful accounts is 0.5 %		Note
Credit sale for 2016	400,000.00		Credit sale for 2016	400,000.00	O
Allowance for doubtful accounts %	1%		Allowance for doubtful accounts %	0.50%	P
Allowance for doubtful accounts	4,000.00		Allowance for doubtful accounts	2,000.00	Q=O*P
Calculation of Bad debt expense for 2016:			Calculation of Bad debt expense for 2016:
Opening balance In allowance for Bad Debt accounts	800.00		Opening balance In allowance for Bad Debt accounts	800.00	R
Accounts receivable written off	500.00		Accounts receivable written off	500.00	S
Unadjusted balance In allowance for Bad Debt accounts	300.00		Unadjusted balance In allowance for Bad Debt accounts	300.00	T=R-S
Allowance for Bad Debt accounts at the end of September	4,000.00		Allowance for Bad Debt accounts at the end of September	2,000.00	See Q
Bad debt expense for 2016:	3,700.00	See I	Bad debt expense for 2016:	1,700.00	U=Q-T
Tax at 30%	1,110.00	M= I*30%	Tax at 30%	510.00	V=U*30%
Net Income will reduce by	2,590.00	N=I-M	Net Income will reduce by	1,190.00	W=U-V
			Change in Net Income by	1,400.00	X=N-W
			So net income will increase by $ 1,400.

Answer C 2
Allowance for doubtful accounts at 1%	4,000.00	See H
Allowance for doubtful accounts at 0.50%	2,000.00	See Q
Decrease in Allowance for doubtful accounts by	2,000.00	Y=H-Q
We know Allowance for doubtful accounts is deducted from Accounts receivable in Balance sheet.
So, if Allowance for doubtful accounts is reduced by $ 2,000 then Accounts receivable in Balance sheet will increase by $ 2000.
Proof:
Balance Sheet	1%	0.50%
Accounts Receivable	25,000.00	25,000.00
Less: Allowance for Bad Debt accounts	4,000.00	2,000.00
Accounts Receivable (net)	21,000.00	23,000.00