Question

You have the following information from the records of Trying to Get This, Corp.: January 1, 2019 December 31, 2019 Accounts receivable $40,000 $60,000 Allowance for bad debts 5,000 200* Defore the end of year adjusting entry Cash sales for the year $100,000 Credit sales for the year $300,000 For the current year, Trying to Get This, Corp. estimates that 1% of their credit sales will become uncollectible (bad debts). 1. What is the dollar amount of bad debts actually written off during 2019? 2. What is the dollar amount of Bad Debt Expense they would be show on the Income Statement for the year ended 2019: 3. How does the adjustment amount for expected Bad Debts effect Net Income for 2019? State whether it will increase or decrease Net Income and the dollar amount) 4. What is the balance in the Allowance for Bad Debts account on 12/31/19, after the necessary adjustment for the future bad debts? 5. What is the amount of net Accounts Receivable that would be reported on the balance sheet for 12/31/19? 6. What is the total amount of cash received by Trying to Get This (HINT: include the collection of accounts receivable) for 2019? 7. Assume Trying to Get This, Corp. wrote off a bad debt for $500 on January 4, 2020. How would this transaction: A. Effect net income for 2020? B. What would be the net realizable value of Accounts Receivable after the write off of the $500 bad debt on January 4, 2020?

Answer 1

(1) Bad debts actually written off will be difference between allowance for bad debt balance on January 1 and December 31st.

While writing off bad debts , Account receivable are credited and allowance for doubtful debt is debited.

Bad debts written off = $5,000-$200

=$4,800

(2) In allowance for bad debt method, bad debts are recorded when they are estimated. even if actual bad debt may occur at later date.

So, as per estimation $300,000*1%=$3,000 should be balance of allowance for bad debts account as on December 31st. Balance is 200$ already so , ($3,000-$200) $2,800 should be recorded as bad debt.

		Debit	Credit
	Bad debt expense	$2,800
	Allowance for bad debt		$2,800

So answer is $2800

3) bad debts expense are debited on income statement.Bad debts is an expense for the firm.

so, it will decrease net income for 2019.

4) Balance in allowance for bad debt account = $200+$2,800

=$3,000

which is 1% of credit sales ($300,000*1%)

5) Net accounts receivable = accounts receivable-allowance for bad debts

Accounts receivable	$60,000
Less: Allowance for bad debt	($3,000)
Net accounts receivable	$57,000

6) First we will calculate amount of cash received from receivables

=Account receivable as on January + Credit sales--accounts receivable as on December

=$40,000+$300,000-$60,000

=$280,000

Now, we will add cash sales

=$280,000+$100,000

=$380,000

7A)Bad debt written off will be deducted from allowance for bad debt account and accounts receivable.it will not affect net income.

Net income is affected while estimating bad debt and not when actual bad debt happens.

7B)$500 is deducted from accounts receivable as well as allowance for bad debt account , so net realizable value is not affected and will remain same $57,000.(As calculated in 5 above)

Account receivable ($60,000-500)	$59,500
Less Allowance for bad debt (3,000-500)	($2500)
Net realizable value	$57,000