Question

AP6-5B (Accounts receivable and uncollectible accounts-percentage of credit sales method) Majestic Equipment Sales Company, which sells only on account, had a $120,000 balance in its Accounts Receivable and a $4,200 balance in its Allowance for Doubtful Accounts on December 31, 2019. During 2020, the company's sales of equipment were $820,000 and its total cash collections from customers were $780,000. During the year, the company concluded that customers with accounts totalling $6,000 would be unable to pay, and wrote these receivables off. However, one of these customers subsequently made a payment of $850. (Note that this amount is not included in the cash collections noted above. At the end of 2020, management decided that it would use an estimate for bad debts of 1% of its credit sales. Required a. Prepare the journal entries to record all the 2020 transactions, including the adjustment for bad debts expense at year end. b. Show how the accounts receivable section of the statement of financial position at December 31, 2020, would be presented. c. What amount of bad debts expense would appear in the statement of income for the year ended December 31, 2020? I

Answer 1

Ans a Credit $8,20,000 Working Accounts Receivable Description Debit Beginning Bal Sales $8,20,000 Collection Write off Reinstate write off 850 Collection $7,80,000 Credit Balance $1,20,000 $9,40,000 $7,80,000 $1,60,000 $6,000 $1,54,000 $1,54,850 $850 $1,54,000 $6,000 Sr. No. Account Title Debit Accounts Receivable $8,20,000 Sales (To record sales on account) Cash $7,80,000 Accounts Receivable (To record collection from customers) Allowance for Doubtful Accounts $6,000 Accounts Receivable (To write off accounts receivable) Accounts Receivable Allowance for Doubtful Accounts (To reinstate the write off on account of collection) Cash $850 Accounts Receivable (To record collection from customers) Bad Debt Expense $9,150 Allowance for Doubtful Accounts (To record bad debt provision) $850 $850 Allowance for Doubtful Accounts Description Debit Credit Balance Beginning Bal ($4,200) Write off $6,000 $1,800 Reinstate write off 850 $950 Negative amount in Balance column represents Credit $850 $9,150 $8,200 Estimated Bad Debt [$820000 x 1%] Add: Debit Balance in unadjusted Allowance for doubtful account Bad Debt entry to be passed $950 $9,150 Ans b Ans c Bad Debt Expense that appear in the Statement of Income for the year ended Decemer 31, 2020 is $9150 Majestic Equipment Sales Compnay Partial Balance Sheet December 31, 2020 Accounts Receivable Less: Allowance for Doubtful Accounts Net Accounts Receivable $1,54,000 ($9,150) $1,44,850