Allowance Method for Accounting for Bad Debts At the beginning of 2017, EZ Tech Company's Accounts Receivable balance was $171,000, and the balance in Allowance for Doubtful Accounts was $2,900. EZ Tech's sales in 2017 were $1,280,000, 80% of which were on credit. Collections on account during the year were $82 Required: 1. Identify and analyze the sales during 2017, Activity Operating Accounts Cash Increase, Accounts Receivable Increase, Sales Revenue Increase Statement(s) Balance Sheet and Income Statement Feedback How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Balance Sheet Income Statement Stockholders Net Assets Liabilities + Equity Revenues Expenses Income Cash 256,000 No Entry Sales Revenue 256,000 No Entry X Accounts Receivable No Entry 1,024,000 No Entry No Entry Feedback Identify and analyze the transactions related to the collections of cash during 2017. Activity Operating Accounts Cash Increase, Accounts Receivable Decrease Balance Sheet only Statement(s) Feedback Check My Work How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Balance Sheet Income Statement Stockholders' Net Assets Liabilities + Equity Revenues Expenses Income Cash 820,000 No Entry No Entry No Entry T Accounts Receivable -820,000 No Entry No Entry No Entry Identify and analyze the transactions related to the write-offs of accounts receivable during 2017. Activity Operating Accounts Allowance for Doubtful Accounts Decrease, Accounts Receivable Decrease Statement(s) Balance Sheet only Feedback Check My Work 1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. a 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. Income Statement accounts: Revenues - Expenses = Net Income. (Equations must stay in balance) 4) Allowance method estimates bad debts on the basis of either the net credit sales of the period or the accounts receivable at the end of the period. 5) Bad Debts Expense recognizes the cost associated with the reduction in asset value, Accounts Receivable. A contra-asset account is used to reduce the asset to its net realizable value. This is accomplished by creating an allowance account, Allowance for Doubtful Accounts. This is a contra account and causes total assets to decrease. 6) Record write-off of accounts receivable to contra-asset account, Allowance for Doubtful Accounts and adjustment to Accounts Receivable. How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, ie, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. If a contra account is decreased, it will have the effect of increasing the corresponding financial statement item. Balance Sheet Income Statement Stockholders' Net Assets Liabilities Equity Revenues Expenses Income 5,000 No Entry No Entry Allowance for Doubtful Accounts Accounts Receivable No Entry No Entry -5,000 No Entry No Entry Feedback Check My Work Partially correct 2. Identify and analyze the adjustments to recognize bad debts assuming that (a) bad debts expense is 3% of credit sales and (b) amounts expected to be uncollectible are 7% of the year-end accounts receivable. a. Identify and analyze the adjustments to recognize bad debts assuming that bad debts expense is 3% of credit sales. Activity Operating Accounts Allowance for Doubtful Accounts Increase, Bad Debts Expense Increase Statement(s) Balance Sheet and Income Statement Fearch 2. Identify and analyze the adjustments to recognize bad debts assuming that (a) bad debts expense is 3% of credit sales and (b) amounts expected to be uncollectible are 7% of the year-end accounts receivable. a. Identify and analyze the adjustments to recognize bad debts assuming that bad debts expense is 3% of credit sales. Activity Operating Accounts Allowance for Doubtful Accounts Increase, Bad Debts Expense Increase Statement(s) Balance Sheet and Income Statement Feedback Check My Work How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. If a contra account is decreased, it will have the effect of increasing the corresponding financial statement item. Balance Sheet Income Statement Stockholders Net Assets Liabilities Equity Revenues Expenses Income Allowance for Doubtful Accounts Feedback Check My Work b. Identify and analyze the adjustments to recognize bad debts assuming that amounts expected to be uncollectible are 7% of the year-end accounts receivable. Activity Accounts Operating Allowance for Doubtful Accounts Increase, Bad Debts Expense Increase Balance Sheet and Income Statement Statement(s) Feedback Check My Work How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item. If a contra account is decreased, it will have the effect of increasing the corresponding financial statement item. Balance Sheet Income Statement Stockholders' Net Assets Liabilities Equity Revenues Expenses Income Allowance for Doubtful Accounts No Entry No Entry Bad Debts Expense Fert 3. What is the net realizable value of accounts receivable on December 31, 2017, under each assumption in part (2)? Using the percentage of sales approach, the net realizable value of the receivables is? Using the percentage of year-end receivables approach, the net realizable value of the receivables is? 4. The recognition of bad debts expense the net realizable value by the amount recorded in bad debts expense and the The write-off of accounts the net realizable value