PSA7.8 Journalise entries to record transactions related to bad debts.

LO8

At 31 December 2019, the trial balance of Lexington Pty Ltd contained the following amounts before adjustment:

Debits

Credits

Accounts receivable

$400000

Allowance for doubtful debts

$1000

Sales

950000

Required

1. Based on the information given, which method of accounting for bad debts is Lexington Pty Ltd using the direct write-off method or the allowance method? How can you tell?
2. Prepare the adjusting entry at 31 December 2019, for bad debts expense assuming that the ageing schedule indicates that $11750 of accounts receivable will be uncollectable.
3. Repeat part (b) assuming that instead of a credit balance there is a $1000 debit balance in the allowance for doubtful debts.
4. During the next month, January 2020, a $5000 account receivable is written off as uncollectable. Prepare the journal entry to record the write-off.
5. Repeat part (d) assuming that Lexington uses the direct write-off method instead of the allowance method in accounting for uncollectable accounts receivable.
6. What type of account is the allowance for doubtful debts? How does it affect how accounts receivable is reported on the statement of financial position at the end of the accounting period?