ABC Co., Inc. sells merchandise on credit. During the fiscal year ended July 31,
ID: 2510176 • Letter: A
Question
ABC Co., Inc. sells merchandise on credit. During the fiscal year ended July 31, 20XX the company had Net Sales of $1,150,000. At the end of the year, it had Accounts Receivable of $300,000 and a debit balance in the Allowance For Uncollectible Accounts of $1,700. In the past approximately 1.4% of Net Sales have proved to be uncollectible. Also an aging of Accounts Receivable reveals that $15,000 of the receivables appear to be uncollectible. Prepare the journal entries to record Uncollectible Accounts Expense using (a.) the percentage of Net Sales method and (b.) the Accounts Receivable aging method. What is the resulting balance of Allowance For Uncollectible Accounts under each method. How would your answers change if Allowance For Uncollectible Accounts has a credit balance of $1,700? ABC Co., Inc. loans an employee $6,000. The employee On November 1, 20AA signs a 3 month 10 % note. Principal and Interest are due and payable at maturity. Prepare the required journal entries on November 1, 20AA (acquisition), on December 31, 20AA (the year end AJE) and on January 31, 20BB (payment).Explanation / Answer
Solution:
Both the questions are different and individual question. I am solving the Problem 1 – Allownce for Uncollectible Account.
Allowance for Doubtful Account Method
Under Allowance for Doubtful Debt method, the company uses an estimate for allowance for doubtful debt by using specified method and accordingly book Bad Debt Expenses for the period.
Allowance method creates bad debts expenses before the company knows specifically which customers will not pay on the basis of prior history and prior experience.
On the basis of prior years’ experience company can reasonably estimate:
(i) what percentage of net credit sales will not be collected, it is called percentage of Net Sales Method
(ii) what percentage of accounts receivable measure will not be collected. It is called Accounts Receivable aging method.
Part (a) --- Uncollectible Accounts Expenses using Percentage of Net Sales method
Allowance for Doubtful Accounts generally has credit balance but in the question it is given debit balance of $1,700.
Unadjusted Debit Balance in Allowance for Doubtful Account is $1,700
Hence, we need to adjust the Allowance for Doubtful Account to the estimated uncollectible amount.
Estimated Uncollectible Amount = Net Sales $1,150,000 x Percentage of Uncollectible Amount 1.4%
= $16,100
We need to adjust the Unadjusted Debit Balance $1,700 in Allowance for Doubtful Account to $16,100 Credit balance. To do that we need to credit $17,800 (16,100 + 1700)) in order to make Allowance for Doubtful Account credit balance $16,100
The following adjusting entry is to be passed
General Journal
Debit
Credit
Uncollectible Accounts Expense
$17,800
Allowance for Uncollectible Accounts
$17,800
Hence, the Uncollectible Accounts Expense for the period = $17,800
Part (b) -- Uncollectible Accounts Expenses using the Accounts Receivable aging method
Estimated Uncollectible Amount = $15,000 (given)
We need to adjust the Unadjusted Debit Balance $1,700 in Allowance for Doubtful Account to $15,000 Credit balance. To do that we need to credit $16,700 (15,000 + 1700)) in order to make Allowance for Doubtful Account credit balance $15,000
The following adjusting entry is to be passed
General Journal
Debit
Credit
Uncollectible Accounts Expense
$16,700
Allowance for Uncollectible Accounts
$16,700
Hence, the Uncollectible Accounts Expense for the period = $16,700
If the allowance for uncollectible accounts has a credit balance of $1,700
Part (a) --- We need to adjust balance to $17,800 and credit this account by $16,100 (17,800 – 1700 because it has already 1700 credit balance). In this case following adjustment entry is to be passed
General Journal
Debit
Credit
Uncollectible Accounts Expense
$16,100
Allowance for Doubtful Accounts
$16,100
Part (b) --- We need to adjust the Allowance for Uncollectible Accounts to $15,000 and to do this we need to credit $13,300 (15,000 – 1700) in this account. In this case following adjustment entry is to be passed
General Journal
Debit
Credit
Uncollectible Accounts Expense
$13,300
Allowance for Doubtful Accounts
$13,300
Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you
Pls ask separate question for remaining parts.
General Journal
Debit
Credit
Uncollectible Accounts Expense
$17,800
Allowance for Uncollectible Accounts
$17,800