Question

Can you please provide explanations? Thank you!

Allowance Method of Accounting for Uncollectibles The following transactions and adjusting entries were completed for Mitchell Co. during the current fiscal year. Mitchell Co. had a credit balance of $22,000 in the Allowance for Doubtful Accounts at the beginning of the year (prior to the entries below). January 30 Accepted a 90-day, 10% note for $40,000 on account from Thermo Flask, Inc. March 1 Received 50% of the $10,000 balance owed by Montgomery Co., a bankrupt business, and wrote off the remainder as uncollectible. May 3 Reinstated the account of Manderlee Co., which had been written off in the preceding year as uncollectible. Received a check from Manderlee Co. for $3,000. May 30 Received the amount due on the note of Jan. 30 from Thermo Flask, Inc. June 12 Accepted 120 day, 6% note for $12,000 from Core 15 Co. on account. October 10 Core 15 Co. dishonored the note dated June 12. November 22 Wrote off the following accounts as uncollectible: Alpine Ski, $3,500 and Dangerous Waters $6,300. Dec. 31 Mitchell Co uses the Analysis of Receivables method for setting the Allowance for Doubtful Accounts. Based on an analysis of the $800,000 receivable balance at Dec. 31, it was estimated that $30,000 would not be collectible. If Mitchell Co. had used the Percent of Sales method for booking Bad Debt Exp. for the year, Sales were $1,500,000 and Mitchell estimates Bad Debt Expense at 1% of sales. What would be the entry? What would the balance in the Allowance for Doubtful Accounts have been after adjustment?

Answer 1

In the books of Mitchell Co. :

Date	Account Titles	Debit	Credit
		$	$
Jan 30	Notes Receivable	40,000
	Accounts Receivable : Thermo Flask Inc.		40,000
Mar 1	Cash	5,000
	Allowance for Doubtful Accounts	5,000
	Accounts Receivable : Montgomery Co.		10,000
	To record collection of accounts receivable and write-off
May 3	Accounts Receivable : Manderlee Co.	3,000
	Allowance for Doubtful Accounts		3,000
	To reistate accounts receivable previously written off
May 3	Cash	3,000
	Accounts Receivable: Manderlee Co.		3,000
	To record collection of accounts receivable
May 30	Cash	41,322
	Note Receivable		40,000
	Interest Revenue		1,322
	To record collection of note receivable and interest revenue
June 12	Notes Receivable	12,000
	Accounts Receivable: Core 15 Co.		12,000
	To record acceptance of note receivable
Oct 10	Accounts Receivable : Core 15 Co.	12,240
	Note Receivable		12,000
	Interest Revenue		240
	To record dishonor of note receivable on maturity
Nov 22	Allowance for Doubtful Accounts	9,800
	Accounts Receivable: Alpine Ski		3,500
	Accounts Receivable: Dangerous Waters		6,300
	To write off accounts receivable
Dec 31	Bad Debt Expense	19,800
	Allowance of Doubtful Accounts		19,800
	Adjustment to record bad debt expense

If Mitchell Co. had used the Percent of Sales method :

Date	Account Titles	Debit	Credit
		$	$
Dec 31	Bad Debt Expense	15,000
	Allowance for Doubtful Accounts		15,000

Balance in Allowance for Doubtful Accounts after the adjustment = $ (22,000 - 5,000 + 3,000 - 9.800 + 15,000) = $ 25,200