Question

13. The Fallston Corporation begins operations in Year One. The company makes credit sales of $1.2 million each year while collecting cash of $800,000. Every year, receivables of $30,000 are written off as being doubtful. Company officials estimate that 5 percent of ending accounts receivable will eventually prove to be uncollectible. What figures will be reported in the company's Year Two financial statements in connection with these credit salee?

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Answer 1

Solution:
Given:
Credit sales each year	$1,200,000
Cash Collected each year	$800,000
Receivable Written off each year	$30,000
Uncollectible each year	5% of ending accounts receivable
	Year 1	Year 2
Calculation of ending Accounts Receivable:
Beginning balance of Accounts Receivable	0	$370,000
Credit sales	$1,200,000	$1,200,000
Less: Cash collected	($800,000)	($800,000)
Less: Written off	($30,000)	($30,000)
Ending Accounts Receivable	$370,000	$740,000
Uncollectible balance /Allowance in Year 1	$18,500	$37,000
	(Ending accounts receivable *5%)	(Ending accounts receivable *5%)
	($370000*5%)	($740000*5%)
Opening balance of Allowance	0	$48,500
Less: Written off	$30,000	($30,000)
Ending balance of allowance	$18,500	$37,000
Adjusting Entry/Bad Debts	$48,500	18500
Written off+Ending Balance in allowance	($30000+$18500)	($37000-$18500)
Year 2
Accounts Receivable	$740,000
Allowance of doubtful accounts	$37,000
(5% of ending accounts receivable)	($740000*5%)
Credit Sales	$1,200,000
Bad Debts	$18,500