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Item 2

Item 2 20 points

Raintree Cosmetic Company sells its products to customers on a credit basis. An adjusting entry for bad debt expense is recorded only at December 31, the company’s fiscal year-end. The 2020 balance sheet disclosed the following:

Current assets:
Receivables, net of allowance for uncollectible accounts of $43,000	$	497,000

During 2021, credit sales were $1,815,000, cash collections from customers $1,895,000, and $52,000 in accounts receivable were written off. In addition, $4,300 was collected from a customer whose account was written off in 2020. An aging of accounts receivable at December 31, 2021, reveals the following:

	Percentage of Year-End		Percent
Age Group	Receivables in Group		Uncollectible
0−60 days	60	%	3	%
61−90 days	10		5
91−120 days	20		25
Over 120 days	10		45

Required:
1. Prepare summary journal entries to account for the 2021 write-offs and the collection of the receivable previously written off.
2. Prepare the year-end adjusting entry for bad debts according to each of the following situations:

1. Bad debt expense is estimated to be 2% of credit sales for the year.
2. Bad debt expense is estimated by adjusting the allowance for uncollectible accounts to the balance that reduces the carrying value of accounts receivable to the amount of cash expected to be collected. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable.
3. Bad debt expense is estimated by adjusting the allowance for uncollectible accounts to the balance that reduces the carrying value of accounts receivable to the amount of cash expected to be collected. The allowance for uncollectible accounts is determined by an aging of accounts receivable.

3. For situations (a)−(c) in requirement 2 above, what would be the net amount of accounts receivable reported in the 2021 balance sheet?

Answer 1

1. Journal entry for $ 52, 000 write off & $ 4,300 collected from written off AR:

Dr. Bad Debt Expense 52,000

Cr. Allowance for uncollectible accounts 52,000

(Being Bad debt expense accounted for an estimated uncollectible AR)

Dr. Allowance for uncollectible account 52,000

Cr. Accounts Receivable 52,000

(Being estimated uncollectible AR written off)

Dr. Accounts Receivable 4,300

Cr. Allowance for uncollectible account 4,300

(Being account already written off reversed as amount received from customer)

Dr. Cash at Bank 4,300

Cr. Accounts Receivable 4,300

(Being cash collected from customer)

No entry will occur in Income statement for $ 4,300 because this belongs to previous year and provisioned accordingly in Balance sheet; Hence only Balance sheet account will have impact for the same.

2. a. Bad Debt Expense - 2% of Credit sales:

Credit Sales = $ 1,815,000

Bad Debt =2% on 1815000 = $ $36,300

Entry as follows:

Dr. Bad Debt Expense 36,300

Cr. Allowance for uncollectible accounts 36,300

(Being 2% of credit sales estimated to be uncollectible and bad debts accounted)

b. Bad debt expense estimated at 10% of year end balance in AR:

Receivables Schedule:
Opening Balance as at January 1, 2021 net of allowance of uncollectible account	497,000
Add: Credit Sales	1,815,000
Less: Cash collected from customers	(1,895,000)
Less: Written off	(52,000)
Add: Written off items collected adjusted in allowance of uncollectible account	4,300
Closing Balance as at December 31, 2021	369,300

Thus Bad debt =10% on $ 369,300 = $ 36,930

Entry as follows:

Dr. Bad Debt Expense 36,930

Cr. Allowance for uncollectible accounts 36,930

(Being 10% of Year End AR estimated to be uncollectible and bad debts accounted)

c. Bad Debt estimated by Ageing schedule as below:

Age Group	% of receivables in this group	Receivables ($)	% Uncollectible	Uncollectible amount ($)
	A	B = $ 369300 * A	C	B * C
0-60 days	60%	221,580	3%	6,647.40
61-90 days	10%	36,930	5%	1,846.50
91-120 days	20%	73,860	25%	18,465.00
Over 120 days	10%	36,930	45%	16,618.50
Closing Balance as at December 31, 2021		369,300		43,577.40

Entry as follows:

Dr. Bad Debt Expense 43,577.40

Cr. Allowance for uncollectible accounts 43,577.40

(Being uncollectible accounts estimated based on AR age group and bad debts accounted)

3.AR reported in balance sheet as below on December 31, 2021:

	Situtaiton a	Situtaiton b	Situtaiton c
Closing Balance of AR as on Dec 31, 2021 (as per Receivables schedule above)	369,300	369,300	369,300.00
Less: Allowance of uncollectible account	36,300	36,930	43,577.40
AR net of allowance of Uncollectible account	333,000	332,370	325,722.60