Situation B: The Isreal Manners Entertainment Group uses the allowance approach
ID: 2770349 • Letter: S
Question
Situation B: The Isreal Manners Entertainment Group uses the allowance approach to estimate bad debt expense, as is reqired of all companies with signigicant sales on accounts receivable. At the end of 2012, the Manners Group reported a balance in accounts receivable of $4,350,000 and estimated that $44,000 of its accounts receivable would likely be uncollectible. The allowance for doubtful accounts has a $1,500 debit balance at year-end, prior to the adjustment needed to raise it to the $44,000 desired amount. Use this information to answer the following questions. 1. how is it possible that the allowance for doubtful accounts has developed a debit balance instea of a credit balance? 2. What amount of bad debt expense should be recorded for 2012? 3. What amount will be reported on the 2012 balance sheet as the net realizable amount of accounts receivable?
Explanation / Answer
1. If the allowance for doubtful accounts has developed a debit balance instead of a credit balance, this implies that certain accounts which were earlier provided for as doubtful have been received back in full, and hence the provision has been affected. The expense was already charged off in the year of making the provisions, and hence any recovery thereagainst can only be adjusted against the provision for doubtful debts made in the books. 2. The amount of bad debt expense to be recorded for 2012 will be debit of $ 1,500 + credit balance in Provision at year end $ 44,000 = $ 45,500. 3. Amount to be reported on the 2012 Balance Sheet will be Gross Accounts Receivable $ 4,350,000 less Provision for Doubtful Debts $ 44,000 = $ 4,306,000.