On 112017 Penman Co had the following account balances in it

On 1/1/2017, Penman Co. had the following account balances in its financial records: Accounts receivable: $122,000 Allowance for uncollectible accounts: $7,900 During 2016, its sales on credit were $1,173,000 and (cash) collections on credit sales were $1,150,000. The following additional transactions occurred during the year: Feb. 19: Wrote off Nissim’s account, $3,600 May 23: Wrote off White’s account, $2,400 Dec. 12: Wrote off Ohlson’s account, $900 Dec. 30: Recorded the provision for uncollectible accounts at 0.8% of credit sales for the year. (Hint: The allowance account is increased by 0.8% of credit sales regardless of any prior write-offs) Compute and show how accounts receivable and the allowance for uncollectible accounts are reported in its balance sheet on December 31, 2017.

Solution

Solution:

The allowance for Doubtful Account

- The allowance for doubtful accounts represents management’s best estimate of the amount of accounts receivable that will not be paid by customers.

- It is an estimate of future bad debts that improves the accuracy of financial statements.

- It is a reduction of the total amount of Accounts Receivable appearing on a company’s balance sheet

- It is listed as a deduction immediately below the accounts receivable line item.

- This deduction is classified as a contra asset account.

There are several methods to calculate the allowance for doubtful accounts since it depends on the estimation. One of them is Percentage of Sales method.

Under Percentage of Sales method, a percentage is calculated based on the past experience on the sale which will be recorded as a reduction from Accounts Receivable and reported as Allowance for Doubtful Accounts.

To record Bad Debt Expense, an adjustment entry is passed at the end of the year and the balance in Allowance for Doubtful Accounts (whether debit or credit balance before adjustment) is adjusted to the Estimated Amount of Allowance for Doubtful Accounts.

Here is the calculation and answer for the question:

Estimated Doubtful Accounts Receivable = 0.8% of Credit Sales = 0.8% x $1,173,000 = $9,384

Now, we need to prepare T-Account of Accounts Receivable and Allowance for Doubtful Account.

Before Adjustment the balance in Allowance for Doubtful Accounts = $7,900 – 3600 – 2400 – 900 = $1,000 Credit

Now, as explained above this year estimated doubtful amount is $9,384 so we need to adjust this Credit balance $1,000 and make it to $9,384 by passing following adjustment entry

Debit Bad Debt Expense $8,384

Credit: The Allowance for Doubtful Accounts $8,384

By passing the above entry the balance of the Allowance for Doubtful Account will become $9,384 Credit which is equals to the estimated doubtful amount for the year.

The Allowance for Doubtful Accounts is reported or listed as a deduction immediately below the accounts receivable line item.

T-Accounts

Accounts Receivable

Beg Bal.

$122,000

Cash Collection

$1,150,000

Credit Sales

$1,173,000

Feb.19 Written Off Nissim\'s A/c

$3,600

May.23 Wrote off White\'s A/c

$2,400

Dec.23 Wrote off Ohlson\'s/Ac

$900

Ending Balance

$138,100

$1,295,000

$1,295,000

Allowance for Doubtful Accounts

Feb.19 Written Off Nissim\'s A/c

$3,600

Beg. Bal.

$7,900

May.23 Wrote off White\'s A/c

$2,400

Bad Debt Expense (As per working above)

$8,384

Dec.23 Wrote off Ohlson\'s/Ac

$900

Ending Balance

$9,384

$16,284

$16,284

Reporting in the balance sheet on Dec 31, 2017

Extract of Balance Sheet

December 31, 2017

Assets:

Accounts Receivable

$138,100

Less: The Allowance for Doubtful Accounts

-$9,384

Net Accounts Receivable

$128,716

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Accounts Receivable
Beg Bal.	$122,000	Cash Collection	$1,150,000
Credit Sales	$1,173,000	Feb.19 Written Off Nissim\'s A/c	$3,600
		May.23 Wrote off White\'s A/c	$2,400
		Dec.23 Wrote off Ohlson\'s/Ac	$900
		Ending Balance	$138,100
	$1,295,000		$1,295,000
Allowance for Doubtful Accounts
Feb.19 Written Off Nissim\'s A/c	$3,600	Beg. Bal.	$7,900
May.23 Wrote off White\'s A/c	$2,400	Bad Debt Expense (As per working above)	$8,384
Dec.23 Wrote off Ohlson\'s/Ac	$900
Ending Balance	$9,384
	$16,284		$16,284