In 20X1 ABC Company had credit sales of $22,000,000. Its year-end balances for a
ID: 2419693 • Letter: I
Question
In 20X1 ABC Company had credit sales of $22,000,000. Its year-end balances for accounts receivable and the allowance for doubtful accounts were $2,000,000 and $50,000, respectively.
Requirement 1 (Be sure to show your calculations for credit.):
a) Assume the company uses the income statement method in estimating bad debts. Make the year-end adjusting entry for bad debts on 12-31-X1 assuming the company’s estimate is based on a 1% rate.
b) Calculate the Net Realizable Value of accounts receivable at year-end.
Requirement 2 (Be sure to show your calculations for credit.):
a) Assume the company uses the balance statement method in accounting for bad debts. Make the year-end adjusting entry for bad debts on 12-31-X1 assuming the company’s estimate is based on a 10% rate.
b) Calculate the Net Realizable Value of accounts receivable at year-end.
Explanation / Answer
a) Bad debt expense Debit 220,000
allowance for doubtful accounts credit 220,000 [22,000,000*.01]
[being bad debt expense recorded ]
b) Net realizable value :
Accounts receivable 2,000,000
Less:Allowance for doubtful account (270,000) [220000+50000]
Net Realizable value 1,730,000
Requirement 2
a) Bad debt expense Debit 150,000
allowance for doubtful accounts credit 150,000 { [2,000,000*.10] - 50000 already exists)
[being bad debt expense recorded ]
b) Net realizable value :
Accounts receivable 2,000,000
Less:Allowance for doubtful account (200,000) [150000+50000]
Net Realizable value 1,800,000