Question

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

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

Accounts receivable	$800,000 Dr.
Allowance for doubtful accounts	40,000 Cr.

During 2020, $90,000 of accounts receivable is considered uncollectible, and no more effort to collect these accounts will be made. Total sales for 2020 are $2,400,000, of which $400,000 are cash sales. A total of $1,800,000 was collected on account during 2020.

a. Assuming that Master 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 $10,000?

a.

1.

Date	Account Name	Dr.	Cr.
Dec. 31, 2020	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer
	To record account write-off
Dec. 31, 2020	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer
	To record bad debt expense

2.

Note: Do not use negative signs with your answers.

Balance Sheet, December 31, 2020
Accounts receivable	Answer
Less: Allowance for doubtful accounts	Answer
Accounts receivable, net	Answer

b.

1.

Date	Account Name	Dr.	Cr.
Dec. 31, 2020	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer
	To record account write-off
Dec. 31, 2020	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer
	AnswerCashAccounts ReceivableAllowance for Doubtful AccountsInterest ReceivableInventoryInventory—Estimated ReturnsRefund LiabilitySales RevenueSales ReturnsSales DiscountSales Discount ForfeitedCost of Goods SoldBad Debt ExpenseN/A	Answer	Answer
	To record bad debt expense

2.

Note: Do not use negative signs with your answers.

Balance Sheet, December 31, 2020
Accounts receivable
Less: Allowance for doubtful accounts
Accounts receivable, net

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Answer 1

Solution Required a(1): Step-1: Computation of Bad debts expense for the Year 2020 Accounts Allowance for Receivable (Gross) Accounts Receivable, Doubtful Accounts net Dr. (Cr.) Bal. ($40,000) $90,000 Dr. (Cr.) Bal. Dr. (Cr.) Bal. $760,000 $0 $2,000,000 $O ($1,800,000) $960,000 ($131,900) $828,100 Balance as at January 1, 2020 Accounts receivables write-offs Sales on Account ($2,400,000-$400,000) Collection from Accounts receivables Ending balance (prior to Bad debts expense) Bad debt expense (WN-1) Ending balance as at December 31, 2020 $800,000 ($90,000) $2,000,000 ($1,800,000) $910,000 $0 $50,000 ($131,900) $0 $910,000 ($81,900) WN-1: Bad debt expense Ending balance, Accounts Receivables $910,000 Estimated uncollectible accounts receivables (expected credit loss) 9% Allowance for doubtful accounts required ($910,000 x 9%) $81,900 Balance in Allowance for doubtful accounts prior to bad debts (Dr. bal.) $50,000 Estimated bad debt expense ($81,900 $50,000) $131,900 Step-2: Journal Entry Account Name Debit Credit Date Dec. 31, 2020 Allowance for Doubtful Accounts $90,000 Accounts Receivable $90,000 To record account write-off Date Account Name Debit Credit Dec. 31, 2020 Bad Debt Expense $131,900 $131,900 Allowance for Doubtful Accounts To record bad debt expense Required a(2): Disclosure Balance Sheet, December 31, 2020 Accounts receivable Less: Allowance for doubtful accounts Accounts receivable, net $910,000 $81,900 $828,100

Required b(1): Step-1: Computation of Bad debts expense for the Year 2020 Accounts Allowance for Receivable (Gross) Accounts Receivable, Doubtful Accounts net Dr. (Cr.) Bal $10,000 Dr. (Cr.) Bal. Dr. (Cr.) Bal. Balance as at January 1, 2020 Accounts receivables write-offs Sales on Account ($2,400,000-$400,000) Collection from Accounts receivables Ending balance (prior to Bad debts expense) Bad debt expense (WN-1) Ending balance as at December 31, 2020 $800,000 $810,000 ($90,000) $2,000,000 ($1,800,000) $910,000 $90,000 $0 $2,000,000 $0 ($1,800,000) $1,010,000 ($181,900) $828,100 $100,000 $0 ($181,900) ($81,900) $910,000 WN-1: Bad debt expense Ending balance, Accounts Receivables $910,000 Estimated uncollectible accounts receivables (expected credit loss) 9% Allowance for doubtful accounts required ($910,000 x 9%) $81,900 Balance in Allowance for doubtful accounts prior to bad debts (Dr. bal.) $100,000 Estimated bad debt expense ($81,900 $50,000) $181,900 Step-2: Journal Entry Date Account Name Debit Credit Dec. 31, 2020 Allowance for Doubtful Accounts $90,000 $90,000 Accounts Receivable To record account write-off Account Name Debit Credit Date Dec. 31, 2020 Bad Debt Expense $181,900 Allowance for Doubtful Accounts $181,900 To record bad debt expense Required b(2): Disclosure Balance Sheet, December 31, 2020 $910,000 Accounts receivable $81,900 Less: Allowance for doubtful accounts Accounts receivable, net $828,100