Question

At December 31,2015, Ethan company reports the following results for its calender year.

Problem 9-3A At December 31, 2015, Ethan Company reports the following results for its calendar year. Cash sales .... Credit sales ......... $1,803,750 3,534,000 In addition, its unadjusted trial balance includes the following items. Accounts receivable ................... Allowance for doubtful accounts ......... $1.070.100 debit 15,750 debit There was objective evidence that 10% of a $150,000 debt owed by a debtor, Nathan Company, would most probably be uncollectible. An aging analysis of the rest of the accounts receivables indicated that an estimated 5% of these accounts would not be collectible. Required 1. Prepare the adjusting entry for this company to recognize bad debts. 2. Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on its December 31. 2015 statement of financial position.

Answer 1

Bad debt = $150,000*10%

                = $15,000

The aging analysis estimate that 5% of the Accounts receivables are not collectible. Thus, allowance account should take such amount into consideration.

= (Accounts receivable – Balance of Nathan Company)*5%

= ($1,070,100 – $150,000)*5%

= ($920,100*5%)

= $46,005

Thus,

Credit balance of Allowance of doubtful debt = Bad debt + Uncollectible using aging analysis

= $15,000 + $46,005

= $61,005

Adjusted Allowance for doubtful debts = Credit balance of Allowance of doubtful debt + Debit balance of unadjusted allowance

= $61,005 + $15,750

= $76,755

PART – 1)

The journal entry for recognizing bad debts will be:

Bad debt A/c                                                   Dr. $76,755

      To Allowance for doubtful debts A/c                                    Cr. $76,755

(Being bade debt recorded)

PART – 2)

The accounts receivable and allowance for the doubtful debt is shown in the balance sheet as follows:

CURRENT ASSETS:

Accounts receivable                                        $1,070,100

( – )  Allowance for doubtful debt ($61,005)

Net Accounts receivable                           $1,009,095