7 points The trial balance before adjustment of Risen Compan

(7 points)

The trial balance before adjustment of Risen Company reports the following balances:

Dr.

Cr.

Accounts receivable

$300,000

Allowance for doubtful accounts

$5,000

Sales (all on credit)

1,700,000

Sales returns and allowances

80,000

Instructions

(a)

(3 points) Prepare the entry for estimated bad debts assuming that doubtful accounts

are estimated to be 6% of gross accounts receivable.

(b)

(2 points) Assume that all the information above in is the same except that the

Allowance for Doubtful Accounts has a debit balance of $5,000 instead of a credit

balance. How will this difference affect the journal entry in part (a)?

(c)

(2 points) On the 3rd

day in January, the company received notice that Blue Co. has

declared bankruptcy and will not be paying their amount due ($2,000). Prepare the

journal entry for the event.

Solution

No Account titles & Explanations Debit Credit a) 1) Bad debts expense 13,000 Allowance for doubtful accounts 13,000 (300,000*6%)-5000 b) 2) Bad debts expense 23,000 Allowance for doubtful accounts 23,000 (300,000*6%)+5000 c) 3) Allowance for doubtful accounts 2,000 Accounts receivable 2,000