Problem - Raintree Cosmetic Company sells its products to customers on a credit basis. An adjusting entry for bad debt expense is recorded only at December 31, the company's fiscal year-end. The 2015 balance sheet disclosed the following:
Current assets:
Receivables, net of allowance for uncollectible accounts of $33.000 $447,000
During 2016, credit sales were $1,765.000, cash collections from customers $1,845.000, and $38,000 in accounts receivable were written off. In addition, $3.300 was collected from a customer whose account was written off in 2015. An aging of accounts receivable at December 31, 2016, reveals the following:
|
Age Group
|
Percentage of Year-End
Receivables in Group
|
Percent
Uncollectible
|
|
0-60 days
|
70%
|
5%
|
|
61-90 days
|
20
|
15
|
|
91-120 days
|
5
|
20
|
|
Over 120 days
|
5
|
40
|
Required:
1. Prepare summary journal entries to account for the 2016 write-offs and the collection of the receivable previously written off.
2. Prepare the year-end adjusting entry for bad debts according to each of the following situations:
a. Bad debt expense is estimated to be 4% of credit sales for the year.
b. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable.
c. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is determined by an aging of accounts receivable.