Question

Estimating and Recording Bad Debt Estimates and Write-offs; Reporting of Accounts Receivable

Orange Company’s December 31, 2019, balances related to accounts receivable follow.

Accounts receivable	$80,000 Dr.
Allowance for doubtful accounts	4,000 Cr.

During 2020, $9,000 of accounts receivable is considered uncollectible, and no more effort to collect these accounts will be made. Total sales for 2020 are $240,000, of which $40,000 are cash sales. A total of $180,000 was collected on account during 2020.

a. Assuming that Orange uses the allowance method to estimate net accounts receivable and uses 9% of accounts receivable as its estimate of expected credit losses, prepare the (1) journal entries to record write-offs and bad debt expense for 2020, and (2) disclosure on gross and net accounts receivable on the balance sheet at December 31, 2020.

b. How would the answers to part a change (if at all) assuming instead that the December 31, 2019, balance in the allowance for doubtful accounts was a debit balance of $1,000?

Date Account Name - Dr. cr. Dec. 31, 2020 To record account write-off Dec. 31, 2020 To record bad debt expense Note: Do not use negative signs with your answers. Balance Sheet, December 31, 2020 Accounts receivable Less: Allowance for doubtful accounts Accounts receivable, net

Answer 1

a)

1)

Date	Account title	Debit	credit
31 December 2020	Allowance for doubtful account	9000
	Accounts receivable		9000
31 December 2020	Bad debt expense	13190
	Allowance for doubtful account		13190

Working :

Accounts receivable at end = Beginning balance + credit sales -write off -collections

                 = 80000+ (240000-40000cash) - 9000 -180000

                 = 80000+ 200000-9000-180000

                 = 91000

Estimated Allowance for doubtful account at year end = 91000 *9%= 8190

Allowance for doubtful account (unadjusted balance) = Beginning balance - write off

                                = 4000 -9000

                                = -5000 or 5000 Debit balance

Bad debt expense =Estimated Allowance for doubtful account at year end -Allowance for doubtful account (unadjusted balance)

                     = 8190 - (-5000)

                     = 8190 +5000

                      =13190

2)

Accounts receivable	91000
Less:Allowance for doubtful account	8190
Accounts receivable ,net	82810

b)

1)

Date	Account title	Debit	credit
31 December 2020	Allowance for doubtful account	9000
	Accounts receivable		9000
31 December 2020	Bad debt expense	18190
	Allowance for doubtful account		18190

Working :

Accounts receivable at end = Beginning balance + credit sales -write off -collections

                 = 80000+ (240000-40000cash) - 9000 -180000

                 = 80000+ 200000-9000-180000

                 = 91000

Estimated Allowance for doubtful account at year end = 91000 *9%= 8190

Allowance for doubtful account (unadjusted balance) = Beginning balance - write off

                                = -1000 -9000

                                = -10000 or 10000 Debit balance

Bad debt expense =Estimated Allowance for doubtful account at year end -Allowance for doubtful account (unadjusted balance)

                     = 8190 - (-10000)

                     = 8190 +10000

                      =18190

2)

Accounts receivable	91000
Less:Allowance for doubtful account	8190
Accounts receivable ,net	82810