Question

On August 31, 2018, Rosebud Floral Supply had a $145,000 debit balance in Accounts Receivable and a $5,800 credit balance in Allowance for Bad Debts. During September, Rosebud made: • Sales on account, $590,000. Ignore Cost of Goods Sold. • Collections on account, $627,000. • Write-offs of uncollectible receivables, $6,000. Read the requirements.

Answer 1

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Rosebud Floral Supply			T accounts
Answer 1			Accounts Receivable Account
Calculation of allowance for Bad Debt accounts at the end of September:			Account	Debit $	Account	Credit $
	Amount $	Note	Opening balance	145,000.00	Cash	627,000.00
Credit sale for September	590,000.00	A	Sales	590,000.00	Allowance for uncollectible account	6,000.00
Allowance for doubtful accounts %	4%	B			Closing balance	102,000.00
Allowance for Bad Debt accounts	23,600.00	C=A*B		735,000.00		735,000.00
			Opening balance	102,000.00
Calculation of Bad debt expense for September:
Opening balance In allowance for Bad Debt accounts	5,800.00	D	Allowance for Bad Debt account
Accounts receivable written off	6,000.00	E	Account	Debit $	Account	Credit $
Unadjusted balance In allowance for Bad Debt accounts	(200.00)	F=D-E	Accounts Receivable	6,000.00	Opening balance	5,800.00
Allowance for Bad Debt accounts at the end of September	23,600.00	See C	Closing balance	23,600.00	Bad debt expense	23,800.00
Bad debt expense for September:	23,800.00	G=C-F		29,600.00		29,600.00
					Opening balance	23,600.00
Journal Entries
Account	Debit $	Credit $	Bad debt expense Account
Accounts Receivable	590,000.00		Account	Debit $	Account	Credit $
Sales		590,000.00	Allowance for uncollectible account	23,800.00	Closing balance	23,800.00
				23,800.00		23,800.00	-
Cash	627,000.00		Opening balance	23,800.00
Accounts Receivable		627,000.00
Allowance for Bad Debt accounts	6,000.00
Accounts Receivable		6,000.00
Bad debt expense	23,800.00
Allowance for Bad Debt accounts		23,800.00
Answer 2
Under Direct Method there is no allowance or reserve for bad Debt account and bad debt expense is directly charged off to Accounts Receivable account.				T accounts
Journal Entries				Accounts Receivable Account
Account	Debit $	Credit $		Account	Debit $	Account	Credit $
Accounts Receivable	590,000.00			Opening balance	145,000.00	Cash	627,000.00
Sales		590,000.00		Sales	590,000.00	Bad debt expense	6,000.00
						Bad debt expense	23,600.00
Cash	627,000.00					Closing balance	78,400.00
Accounts Receivable		627,000.00			735,000.00		735,000.00
				Opening balance	78,400.00
Bad debt expense	6,000.00
Accounts Receivable		6,000.00		Bad debt expense Account
(accounts written of during September)				Account	Debit $	Account	Credit $
				Accounts Receivable	6,000.00	Closing balance	29,600.00
Bad debt expense	23,600.00			Accounts Receivable	23,600.00
Accounts Receivable		23,600.00			29,600.00		29,600.00
(Bad debt expense at 4% of credit sales)				Opening balance	29,600.00
Answer 3	Allowance Method	Direct Method
Bad debt expense to be reported	23,800.00	29,600.00	See Bad Debt T account in Answer 1 and 2 for this.
Amount under Allowance Method matches better with revenue. Direct Method does not follow prudence method. Allowance Method ensures that reasonable amount of bad debt expense is booked against each sale and that confirms that matching concept under GAAP.
Answer 4	Allowance Method	Direct Method
Accounts Receivable	102,000.00	78,400.00	See Accounts Receivable T account in Answer 1 and 2 for this.
Less: Allowance for Bad Debt accounts	23,600.00	-	See Allowance for Bad Debt accounts T account in Answer 1 for this.
Accounts Receivable (net)	78,400.00	78,400.00
Amount under Allowance Method is more realistic. It shows gross balance of Accounts Receivable and estimated Allowance for Bad Debt. If in future there is no bad debts then there will be full collection of Accounts Receivable. But under Direct Method Accounts Receivable is already less. If in future bad debt expense previously written off is recovered it will create unnecessary gains in books.