Accounting for Receivables Ch 7 practice problem #2: Percent of Receivables-Accounting for Uncollectible Accounts (formerly Demo Problem 7-1) The Solo Company was started on January 1, Year 1. The following events occurred during Year 1 and Year 2. Year 1 1. Provided $4,000 of services on account. 2. Collected $3,000 cash from accounts receivable. 3. Adjusted accounts to reflect uncollectible account expense for the year. Solo estimates 6% of the ending accounts receivable balance will be uncollectible. Year 2 1. Wrote off $40 of accounts receivable that were deemed uncollectible. Write off an uncollectible account The amount of the uncollectible account is removed from the Accounts Receivable account AND from the Allowance for Doubtful Accounts account. The impact is NOTHING!! (Because the balances in both the A/R account (an asset account) and the ADA account (a contra-asset account) decrease (get smaller), the net realizable value of receivables remains unchanged! What impact does a write-off have on NRV? 2. Provided $6,500 of services on account. 3. Collected $4,210 cash from accounts receivable. 4. Received $5 from an uncollectible account (bad debt) that had been previously written off. Reinstated the account. Recovery of an Uncollectible Account: Reinstate Receivable . Occasionally a company receives payment from a customer whose account was previously written off (such as Mr. Smith). Step 1: In such cases, the customer's account should be reinstated (Step 1 of reinstating a receivable). In other words, the write-off must be reversed, but only in the amount being paid. Thereby, the amount received would be added back to the A/R list (debit A/R) and the ADA would be increased by the same amount (credit ADA). Step 2: The collection of the payment is recorded like any other collection of a receivable account. (#5 below) WHY? The account receivable is reinstated because a complete record of the customer's payment history may prove useful in the future AND the process serves as an internal control to protect the company. 5. (This is Step 2.) Recorded the $5 cash received from the receivable reinstated in Event No. 4. 6. Adjusted accounts to reflect uncollectible account expense for the year. Solo estimates 2% of the ending accounts receivable balance will be uncollectible. Required for year 2 a. Record the events in T-accounts. Close the revenue and expense accounts to retained earnings. b. Record the events using the horizontal financial statements model under the titles of the affected accounts.