Question

Estimating and Recording Bad Debt Estimates and Write-offs; Reporting of Accounts Receivable

At December 31, 2020, its annual year-end, the accounts of Sun Systems Inc. show the following.

1. Sales revenue for 2020, $288,000, of which one-sixth was on account.
2. Allowance for doubtful accounts, balance December 31, 2019, $1,440 credit.
3. Accounts receivable, balance December 31, 2020 (prior to any write-offs of uncollectible accounts during 2020), $28,880.
4. Uncollectible accounts to be written off, December 31, 2020, $1,680.
5. Aging schedule at December 31, 2020, showing the following breakdown of total accounts receivable, excluding amounts to be written off.

Status	Amount
Not past due	Remainder
Past due 1–60 days	$6,400
Past due over 60 days	4,800

Required

a. Prepare the 2020 entry to write off the uncollectible accounts.

b. Prepare the 2020 adjusting entry to record bad debt expense for each of the following separate assumptions concerning expected bad debt loss rates.

1. Based on credit sales, 1.5%.

2. Based on total receivables at year-end, 2.5%.

3. Based on aging schedule: not past due, 0.5%; past due 1–60 days, 1%; and past due over 60 days, 8%.

4. Based on direct write-off method (assume entry in part a has not been recorded).

c. Prepare the 2020 balance sheet disclosure relating to accounts receivable for each assumption 1 through 4 of part b.

(Please explain b3 and b4 with more details. Thank you)

a. Cr. Date Account Name Dec. 31, 2020 Allowance for Doubtful Accounts Accounts Receivable - Dr. 1680 0 1680 b. Dr. Cr. Date Account Name Dec. 31, 2020 Bad Debt Expense Allowance for Doubtful Accounts 720 0 720 0 Dr. Cr. Date Account Name Dec. 31, 2020 Bad Debt Expense Allowance for Doubtful Accounts

Answer 1

a.
Date	Account Name	Dr.	Cr.
Dec.31, 2020	Allowances for Doubtful Accounts	1680
	Accounts Receivable		1680
b.
1
Date	Account Name	Dr.	Cr.
Dec.31, 2020	Bad debt expenses	720
	Allowances for Doubtful Accounts		720
Credit sale = 288000*1/6		48000
Bad debt expense = 1.5% of $48000		720
2
Date	Account Name	Dr.	Cr.
Dec.31, 2020	Bad debt expenses	962
	Allowances for Doubtful Accounts		962
Calculation
	Toatal Receivable at the end	28880
	Uncollctibel allowance = 2.5%of $28880	722
	Balance in allowances for uncollectibel
	after write off = $1440-1680	-240	Dr balance
	So new bad debt expense = $240+722	962
3
Date	Account Name	Dr.	Cr.
Dec.31, 2020	Bad debt expenses	865
	Allowances for Doubtful Accounts		865
Calculation
Status	Amount	% Uncollectible
Not past due	$17,680	0.50%	177
Past due 1–60 days	$6,400	1%	64
Past due over 60 days	4,800	8%	384
			625
	after write off = $1440-1680	-240	Dr balance
	So new bad debt expense = $240+448	865
4
Date	Account Name	Dr.	Cr.
Dec.31, 2020	Bad debt expenses	1680
	Accounts Receivable		1680
Explanation
Explanation: If direct write off method is followed the bad debt expense are recorded only when there is actual uncollectible and that is also directly adjusted to accounts receivable not allowances for doubtful account as there will not be any such account in direct write off method

Balance Sheet, December 31, 2020	1	2	3	4
Accounts receivable	$        28,880	$        28,880	$        28,880	$        27,200
Less: Allowances for doubtful Accounts	$              480	$              722	$              625	$                 -
Accounts receivable, net	$        28,400	$        28,158	$        28,255	$        27,200