Accounting for Receivables and Bad Debts
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Also please see the attached files P9-1A and P9-2A.
P9-1A Preparing journal entries related to bad debts expense.
At December 31 2007, Leis Co. reported the following information on its balance sheet.
Accounts receivable $960,000
Less: Allowance for doubtful accounts 80,000
During 2008, the company had the following transactions related to receivables.
1. Sales on account $3,200,000
2. Sales returns and allowances 50,000
3. Collections of accounts receivable 2,810,000
4. Write-offs of accounts receivable deemed uncollectible 90,000
5. Recovery of bad debts previously written off as uncollectible 24,000
Instructions
(a) Prepare the journal entries to record each of these five transactions. Assume that no cash discounts were taken on the collections of accounts receivable.
(b) Enter the January 1, 2008, balances in Accounts Receivable and Allowance for Doubtful Accounts, post the entries to the two accounts (use T accounts), and determine the balances.
(c) Prepare the journal entry to record bad debts expense for 2008, assuming that an aging of accounts receivable indicates that expected bad debts are $115,000.
(d) Compute the accounts receivable turnover ratio for 2008.
P9-2A Computing bad debts amounts.
Information related to Hermesch Company for 2008 is summarized below.
Total credit sales $2,200,000
Accounts receivable at December 31` 825,000
Bad debts written off 33,000
Instructions
(a) What amount of bad debts expense will Hermesch Company report if it uses the direct write-off method of accounting for bad debts?
(b) Assume that Hermesch Company estimates its bad debts expense to be 2% of credit sales. What amount of bad debts expense will Hermesch record if it has an Allowance for Doubtful Accounts credit balance of $4,000?
(c) Assume that Hermesch Company estimates its bad debts expense based on 6% of accounts receivable. What amount of bad debts expense will Hermesch record if it has an Allowance for Doubtful Accounts credit balance of $3,000?
(d) Assume the same facts as in (c) except that there is a $3,000 debit balance in Allowance for Doubtful Accounts. What amount of bad debts expense will Hermesch record?
(e) What is the weakness of the direct write-off method of reporting bad debts expense?
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Solution Summary
This solution is comprised of two financial accounting problems dealing with the following: 1) how to prepare journal entries relating to bad debts expense, 2) how to compute bad debts amounts using different methods, and 3) how to compute the accounts receivable turnover ratio. This solution also discusses the weakness of the direct write-off method of reporting bad debts expense. The problems shown here are taken from Financial Accounting, 6th ed., Wiley Publishing, however, the detail step-by-step explanation of these topics provides students with a clear understanding of the concepts.
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