Question

t the end of the year, the M. I. Wright Company showed the following selected account balances:

Sales (all on credit)............................................................................................... $300,000

Accounts Receivable........................................................................................... 800,000

Allowance for Doubtful Accounts....................................................................     38,000

Required:

1.         Assume the company estimates that 1% of all credit sales will not be collected.
            a.         Prepare the proper journal entry to recognize the expense                                  involved.
            b.         Present the balances in Accounts Receivable and Allowance for                      Doubtful Accounts as they would appear on the balance sheet.                         Also show the net realizable Accounts Receivable.

2.         Assume the company estimates that 5% of its accounts receivable     will never be collected.
            a.         Prepare the proper journal entry to recognize the expense                                  involved.
            b.         Present the balances in Accounts Receivable and Allowance for                      Doubtful Accounts as they would appear on the balance sheet.                                    Also show the net realizable Accounts Receivable.

3.         Under assumptions 1 and 2 above, give the proper journal entries for             the following events.

    June 3     John Shifty, who owes us $500, informs us that he is broke and cannot pay. We believe him.

    Nov. 9      We learned that John Shifty has won the lottery and is willing to pay off all his old debts.

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Answer 1

1a)

Account title	Debit	Credit
Bad Debts Expense   (300,000 x 0.01)	3,000.00
Allowance For Doubtful Accounts		3,000.00

1b)

Accounts Receivable	800,000.00
Less: Allowance for Doubtful Accounts	41,000.00
Estimated Realizable Accounts Receivable	759,000.00

2a)

Account title	Debit	Credit
Bad Debts Expense   (800,000 x 0.01) - (38,000)	2,000.00
Allowance For Doubtful Accounts		2,000.00

2b)

Accounts Receivable	800,000.00
Less: Allowance for Doubtful Accounts	40,000.00
Estimated Realizable Accounts Receivable	760,000.00

3)

	Account title	Debit	Credit
Jun-03	Allowance For Doubtful Accounts	500.00
	Accounts Receivable- John Shifty		500.00
Nov-09	Accounts Receivable- John Shifty	500.00
	Allowance For Doubtful Accounts		500.00