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Uncollectible Accounts GIVEN: The ABC Company has just completed its fourth year of operations. Sales have tripled since in three years and ABCs management has
Uncollectible Accounts | |||||||||
GIVEN: | The ABC Company has just completed its fourth year of operations. Sales have tripled since in three years and ABCs | ||||||||
management has asked you to evaluate its method of accounting for uncollectible accounts. The following information is | |||||||||
provided to you. ABC generally writes-off uncollected accounts by the time they are 13 months past due. | |||||||||
Sales: Year 1: $1,100,000 Year 2: $1,600,000 Year 3: $2,000,000 Year 4: $2,200,000 | |||||||||
Uncollectible Accounts: | |||||||||
Year Account Receivable Originated | Year Account Receivable is Written Off | ||||||||
Year 1 | Year 2 | Year 3 | Year 4 | Total | |||||
From Year 1 Sales | $10,000 | $11,000 | $21,000 | ||||||
From Year 2 Sales | $13,500 | $12,000 | $25,500 | ||||||
From Year 3 Sales | $17,000 | $15,000 | $32,000 | ||||||
From Year 4 Sales | $17,100 | $17,100 | |||||||
Total Written Off | $10,000 | $24,500 | $29,000 | $32,100 | $95,600 | ||||
REQUIRED: | |||||||||
Part 1: | Assume that the direct write-off method is used. Give the journal entries for Year 1, Year 2 and Year 3 to | ||||||||
recognize uncollectible accounts expense. | |||||||||
a. | Year 1 | Year 2 | Year 3 | ||||||
Assume that the allowance method is used. | |||||||||
b. | Give the journal entries for Year 1, Year 2 and Year 3 to recognize uncollectible accounts expense | ||||||||
assuming uncollectible accounts are estimated to be 1% of sales. | |||||||||
Year 1 | Year 2 | Year 3 | |||||||
c. | What would be the balance in the Allowance account at the end of Year 1, Year 2, and Year 3? | ||||||||
Estimate | Written-off | Allow. Bal. | |||||||
Year 1 | |||||||||
Year 2 | |||||||||
Year 3 | |||||||||
Part 2: | Suppose ABC Company uses the balance sheet approach to recognizing bad debt expense based on a year end accounts | ||||||||
receivable aging schedule. The aging schedule as of 12/31/16 indicates that $98,000 in accounts receivable are estimated | |||||||||
to become uncollectible. The allowance for doubtful accounts shows an unadjusted $1,000 credit balance immediately | |||||||||
before the year end adjustment for bad debt expense. The 12/31/16 gross accounts receivable balance is $890,000. | |||||||||
a. | Provide the 12/31/16 adjusting entry to record estimated bad debt expense. | ||||||||
12/31/2016 | |||||||||
b | Indicate the 12/31/16 net realizable value of accounts receivable. | ||||||||
A/R | |||||||||
Less: allowance for doubtful accounts | |||||||||
Net realizable value of A/R | |||||||||
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