Question

Colorado Rocky Cookie Company offers credit terms to its customers. At the end of 2016, accounts receivable totaled $715,000. The allowance method is used to account for uncollectible accounts. The allowance for uncollectible accounts had a credit balance of $50,000 at the beginning of 2016 and $30,000 in receivables were written off during the year as uncollectible. Also, $3,000 in cash was received in December from a customer whose account previously had been written off. The company estimates bad debts by applying a percentage of 15% to accounts receivable at the end of the year. Required: 1. Prepare journal entries to record the write-off of receivables, the collection of $3,000 for previously written off receivables, and the year-end adjusting entry for bad debt expense. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

1.Preparation of journal entries to record the write-off of receivables, the collection of $3,000 for previously written off receivables, and the year-end adjusting entry for bad debt expense.

Journal entries

1.Record the write-off of receivable

	Debit	Credit
Allowance for uncollectible accounts	$30,000
Accounts receivable (To record the write-off of receivable)		$30,000

Explanation: Under allowance method, company write-off the amount of “Accounts receivable” of certain customers, those receivables are considered as uncollectable. Write-off amount is called as “Allowance for uncollectible accounts” which is considered as contra-Asset Account and it will decrease the Accounts Receivable in the Balance sheet.

In this scenario, we will be Debit “Allowance for uncollectible accounts“ account with $30,000 and Credit “Accounts Receivable” account with $30,000.

2.Record the reinstatement of an account previously written off

	Debit	Credit
Accounts receivable	$3,000
Allowance for uncollectable accounts                      (To record the reinstatement of an account previously written off)		$3,000

Explanation: In case, if customer paid the amount of “Accounts receivable“ to the company, which previously had been written off, we must reinstate the Accounts receivable account which previously written off with the amount received from the customer. For reinstating, we will reverse the journal entry for write -off of Accounts receivable.

In this scenario, we will be Credit “Allowance for uncollectible accounts” account with $3,000 and Debit “Accounts Receivable” account with $3,000.

3.Record the collection of account previously written off

	Debit	Credit
Cash	$3,000
Accounts receivable                      (To record the reinstatement of an account previously written off)		$3,000

Explanation: In case, if customer paid the amount of “Accounts receivable“ to the company, which previously had been written off, we will be record the amount received from the customer after reinstatement of the Accounts receivable account. When we receive amount from customers, “Accounts receivable” account will be reduced and “Cash” account will be increased.

In this scenario, we will be Debit “Cash” account with $3,000 and Debit “Accounts Receivable” with $3,000

4.Record Bad debt expense for the year

	Debit	Credit
Bad debt expenses	$84,250
Allowance for uncollectable accounts                      (To record the Bad debt expenses for the year)		$84,250

Explanation: Under allowance method, company will charge Bad debts Expenses as a percentage of “Accounts Receivable” which is considered as uncollectable.

In this scenario, required bad debt percentage is 15% of accounts receivable $715,000 at the end of the year will be $107,250. But we received $3000 “Accounts receivable“ to the company, which previously had been written off.

So, Actual Accounts receivable balance at the end of year before the adjustment of bad debts expenses will be;

Accounts receivable balance, beginning of the year…………………………………….………. $50,000
Less: Receivables written off ……………………………………………………………………………..…(30,000)
                                                                                                                            ………….         $20,000

Add: Cash received of “Accounts receivable previously written off………………….…... $3,000

Accounts receivable balance, before the adjustment of bad debts expenses……..…. $23,000

Therefore, Bad debt expenses for the year will be $84,250 ($107,250 -$23000)

In this scenario, we will be Debit “Bad debt Expenses” account with $84,250 and Debit “Allowance for uncollectable account” with $84,250