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The Allowance for Doubtful Accounts should have a balance of $45,000 at yearend. The supporting calculations are shown below:
Expected
Days Account
Outstanding
Percentage
Amount
Estimated Uncollectible
Uncollectible
015 days
$300,000
.02
$ 6,000
1630 days
100,000
.10
10,000
3145 days
80,000
.15
12,000
4660 days
40,000
.20
8,000
6175 days
20,000
.45
9,000
$45,000
The accounts which have been outstanding over 75 days ($15,000) and have
zero probability of collection would be written off immediately by a debit to
Allowance for Doubtful Accounts for $15,000 and a credit to Accounts
Receivable for $15,000. It is not considered when deter-mining the proper
amount for the Allowance for Doubtful Accounts.
(b)
$540,000
45,000
$495,000
(c)
The year-end bad debt adjustment would decrease before-tax income $20,000
as computed below:
Estimated amount required in the Allowance
for Doubtful Accounts..................................................................................
$45,000
25,000
$20,000
Problem 7-6 The balance sheet of Starsky Company at December 31, 2010, includes the
following. Notes receivable$36,000 Accounts receivable182,100 Less: Allowance for
doubtful accounts 17,300200,800 Transactions in 2010 include the following. 1.Accounts
receivable of $318,000 were collected including accounts of $60,000 on which 2% sales
discounts were allowed. 2.$5,300 was received in payment of an account which was
written off the books as worthless in 2010. (Hint: Reestablish the receivable account)
3.Customer accounts of $17,500 written off during the year. 4.At year-end the Allowance
for Doubtful Accounts was estimated to need a balance of $20,000. this estimate is based
on an analysis of aged accounts receivable. Instructions Prepare all journal entries
necessary to reflect the transactions above
1
Cash......................................................................................................
Sales Discounts....................................................................................
136,800*
1,200
Accounts Receivable...............................................................
138,000
5,300
5,300
5,300
5,300
17,500
Accounts Receivable...............................................................
17,500
4
Bad Debt Expense...............................................................................
Allowance for Doubtful Accounts..........................................
*($17,300 + $5,300 $17,500 = $5,100;
$20,000 $5,100 = $14,900)
14,900
14,900*