The ledger of Ruru Company at the end of the current year shows Accounts Receivable $200,000, Sales $1,400,000, and Sales Returns and Allowances $50,000. Instructions:
(a) If Ruru uses the direct write-off method to account for uncollectible accounts, journalize theadjusting entry at December 31, assuming Ruru determines that Barking Ghosts Company’s $2,400 balance is uncollectible.
(b) If Allowance for Doubtful Accounts has a credit balance of $3,500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales, and (2) 10% of accounts receivable.
(c) If Allowance for Doubtful Accounts has a debit balance of $370 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 0.75% of net sales and (2) 6% of accounts receivable.
(d) Why is the allowance method required by GAAP?
Notes 1 | |||
Allowance of doubtful account (credit balance) after adjustment (200000*10%) | 20,000 | ||
Less: Allowance of doubtful account (credit balance) available before adjustment (As per question) (credit balance means already adjustment made.) |
(3,500) | ||
Adjustment of bad debts expense | 16,500 | ||
Notes 2 | |||
Allowance of doubtful account (credit balance) after adjustment (200000*6%) | 12,000 | ||
Add: Allowance of doubtful account (debit balance) available before adjustment (As per question) (debit balance means extra adjustment required to make.) |
370 | ||
Adjustment of bad debts expense | 12,370 |
If Ruru uses the direct write-off method to account for uncollectible accounts, journalize the adjusting entry at December 31, assuming Ruru determines that Barking Ghosts Company’s $2,400 balance is uncollectible. | |||
Adjustment entries | |||
Transaction | General journal | Debit | credit |
a | Bad debts expense | 2,400 | |
Accounts receivable - Barking Ghosts Company | 2,400 | ||
To record bad debts expense. | |||
If Allowance for Doubtful Accounts has a credit balance of $3,500 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 1% of net sales, and (2) 10% of accounts receivable. | |||
Adjustment entries | |||
Transaction | General journal | Debit | credit |
b1 | Bad debts expense | 13,500 | |
Allowance of doubtful account | 13,500 | ||
To record Bed debts expense under Sales method. (net sales = 1400000-50000 = 1350000) (1350000*1%) | |||
b2 | Bad debts expense | 16,500 | |
Allowance of doubtful account | 16,500 | ||
To record Bed debts expense. (notes 1) | |||
If Allowance for Doubtful Accounts has a debit balance of $370 in the trial balance, journalize the adjusting entry at December 31, assuming bad debts are expected to be (1) 0.75% of net sales and (2) 6% of accounts receivable. | |||
Adjustment entries | |||
Transaction | General journal | Debit | credit |
c1 | Bad debts expense | 10,125 | |
Allowance of doubtful account | 10,125 | ||
To record Bed debts expense under Sales method. (net sales = 1400000-50000 = 1350000) (1350000*0.75%) | |||
c2 | Bad debts expense | 12,370 | |
Allowance of doubtful account | 12,370 | ||
To record Bed debts expense. (notes 2) | |||
Why is the allowance method required by GAAP? | |||
As per the matching concept, revenues and expenses related to revenue should record in the same accounting period. The allowance method helps to confirm the U.S.GAAP by matching concept through estimating bad debts expenses and recorded in the same accounting period. |
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