16-4 Section D The following account balances are those of Bakers, Inc. on December 31, the end of the fiscal year, before adjustments. Accounts Receivable $57,600 Allowance for Bad Debts $1,900 credit Credit Sales $350,000 Directions: Record the necessary adjusting entry to record Bad Debt Expense in each of the following independent cases. (20 points total) (a) Uncollectible accounts are estimated at 1% of credit sales. (6) An aging of the accounts receivable indicates that $3,600 will not be collected. (C) Assume the same facts as in (b), except that the balance in Allowance for Bad Debts is a $470 debit before adjustments. (d) Assume the same facts as in (a), except that the balance in Allowance for Bad Debts is a $350 debit before adjustments. GENERAL JOURNAL DATE DESCRIPTION ADJUSTING ENTRIES POST REF DEBIT CREDIT Styles Paragraph For Scoring Answers 1. A major reason companies sell on account is to increase sales. 2. The more willing a business is to make sales on account, the more uncollectible accounts it is likely to have. 3. Bad debt expense is a loss from failure to collect an account receivable. 4. The allowance method is a technique that attempts to recognize bad debt expense in the same period that the related credit sales are made. 5. Net realizable value of accounts receivable is the amount the business has collected 6. The expense of extending credit to make a sale should be recognized in the same period as the revenue from the sale. 7. Under the cash basis of accounting, the allowance method is generally required for financial reporting purposes. 8. Under the direct write-off method, the write-off of an account affects the balance sheet and the income statement 9. A company may switch every year from one method of estimating and writing off uncollectibles to another method. 10. The net realizable value of accounts receivable is the amount a company is certain it will be able to collect from its customers 11. The percentage of sales method is based on the relationship between the amount of accounts receivable at year end and the amount of uncollectible accounts 12. There are no disadvantages to the direct write-off method therefore, that is the method that most companies use for recording uncollectible accounts 13. The probability that a customer's account will not be collected decreases with the length of time the account has been outstanding 1 1 1