Question

Problem 8-7A Uncollectible accounts LO2, 3

Aaron Servicing showed the following partial unadjusted results at October 31, 2020, its year-end:

Account	Debit		Credit
Sales			$	1,630,000
Accounts receivable	$	147,000
Allowance for doubtful accounts		3,000

Part 1

Required:
a. Assuming Aaron estimates bad debts to be 1.5% of sales, prepare the adjusting entry at October 31, 2020.

b. Show how accounts receivable would be shown on the October 31, 2020, balance sheet using your calculations in (a).

Part 2

Required:
c. Instead of (a), assume that Aaron estimates bad debts to be 5% of outstanding accounts receivable. Prepare the adjusting entry at October 31, 2020.

d. Show how accounts receivable would be shown on the October 31, 2020, balance sheet using your calculations in (c).

Answer 1

Part 1

a.

Bad debts = $1,630,000 X 1.5% = $24,450

Date	Account Titles and Explanation	Debit	Credit
Oct 31,2020	Bad debts	$24,450	-
	Allowance for doubtful accounts	-	$24,450
	(To record estimate of uncollectible accounts)

b.

Assets
Current assets:
Accounts receivable	$147,000
(Less): Allowance for doubtful accounts ($24,450 - $3,000)	$21,450	$125,550

Part 2

c.

Bad debts = ($147,000 X 5%) + $3,000 = $10,350

Date	Account Titles and Explanation	Debit	Credit
Oct 31,2020	Bad debts	$10,350	-
	Allowance for doubtful accounts	-	$10,350
	(To record estimate of uncollectible accounts)

d.

Assets
Current assets:
Accounts receivable	$147,000
(Less): Allowance for doubtful accounts ($10,350 - $3,000)	$7,350	$139,650