Question

At the end of the year, the M. I. EverCool Company showed the following selected account balances: Sales (all on credit). Accounts Receivable. ................ Allowance for Doubtful Accounts..... (All Normal Balances) .$400,000 900,000 ........... 42,000 Required: 1. Assume the company estimates that 1% of all credit sales will not be collected a. Prepare the proper journal entry to recognize the expense involved. Assume the company estimates that 5% of its accounts receivable will never be collected. a. Prepare the proper journal entry to recognize the expense involved. Under the assumptions above, give the proper journal entries for the following events. June 3 John Shifty, who owes us $900, informs us that he is broke and cannot pay. We believe him. We write off the account Nov. 9 John Shifty has won the lottery and is willing to pay off all his old debts. He drops off a $900 cash payment. We reinstate the account and record the payment.

Answer 1

1 a. Accounting entry for recognizing expense (percentage of credit sales method)

Bad debt expense Debit $4000

Allowance for doubtful debts Credit $4000

(Being bad debts expense recorded for 1% of total credit sales of $400,000)

2a. Accounting entry for recognizing expense (percentage of accounts receivable method)

Here we have to consider that there is already a balance of $ 42000 in the allowance for doubtful accounts

5% of total receivables balance comes to $45000, however since $ 42000 is already provided, only the balance amount I.e. $3000 needs go be provided now

Bad debts expense Debit $3000

Allowance for doubtful debts Credit $3000

(Being bad debts expense recorded for 5% of receivables balance)

3. Accounting entry on 3rd June

Allowance for doubtful debts Debit $900

Accounts receivable account Credit $900

(Being entry to record write off of receivable from John Shifty)

Accounting entry on Nov 9th

Accounts receivable account Debit $900

Allowance for doubtful debts Credit $ 900

(Being entry to reverse the write off of receivable from John shifty)

Cash account Debit $900

Accounts receivable account Credit $900

(Being entry to record receipt of money from John shifty)