Download The T-accounts for Allowance for Bad Debts and Bad Debts Expense have been opened for you. and more Exams Finance in PDF only on Docsity! Requirements 1. The T-accounts for Allowance for Bad Debts and Bad Debts Expense have been opened for you. Record the transactions in the general journal. Post to the two T-accounts and keep running balances, assuming all accounts begin with a zero balance. 2. Assume the December 31, 2017, balance of Accounts Receivable is $ 133,000. Show how net accounts receivable would be reported on the balance sheet at that date. Companies sell to their customers in cash or on account. Recall that sales "on account" are those where the customer promises to pay the company at a later date. Sales on account create an accounts receivable asset for the company. Accounts receivable, also called trade receivables, represent the right to receive cash in the future from customers for goods sold or for services performed. Selling on account brings both a benefit and a cost. The benefit to a business is the potential increased revenues and profits by making sales to a wider range of customers. The cost, however, is that some customers do not pay, creating uncollectible receivables. Customers' accounts receivables that are uncollectible must be written off or removed from the books because the company does not expect to receive cash in the future. Instead, the company must record an expense associated with the cost of the uncollectible account. This expense is called bad debts expense. There are two methods of accounting for uncollectible receivables and recording the related bad debts expense: Direct write-off method Allowance method Requirement 1. The T-accounts for Allowance for Bad Debts and Bad Debts Expense have been opened for you. Record the transactions in the general journal. Post to the two T-accounts and keep running balances, assuming all accounts begin with a zero balance. Begin by recording the 2016 transactions. Dec.31: Estimated that bad debts expense for the year was 3% of credit sales of $ 420,000 and recorded that amount as expense. The company uses the allowance method. Dialex Watches uses the percent-of-sales method to estimate the amount of bad debts expense. Use the following formula to calculate the bad debts expense. Estimated Net credit sales x uncollectible percent = Bad Debts Expense $420,000 x 3% = $12,600 Now record the estimated bad debts expense for the year. Remember that when using the allowance method, the offset to the expense is a contra account called Allowance for Bad Debts. To record this expense on the books of Dialex Watches we must increase (debit) the Bad Debts Expense account and (credit) the Allowance for Bad Debts account. (Record debits first, then credits. Select the explanation on the last line of the journal entry table.) Date Accounts and Explanation Debit Credit 2016 Bad Debts Expense 12,600 Dec. 31 Allowance for Bad Debts 12,600 (Adj.) Recorded bad debts expense for the period. Dec.31: Made the closing entry for bad debts expense. Refer to the entry you prepared in the preceding step. The Bad Debts Expense account holds a $ 12,600 debit balance. To close this account we reduce (credit) the Bad Debts Expense account by its entire balance$ 12,600 and then debit the Income Summary account by the same amount. (Record debits first, then credits. Select the explanation on the last line of the journal entry table.) Date Accounts and Explanation Debit Credit 2016 Income Summary 12,600 Dec. 31 Bad Debts Expense 12,600 (Clos.) Close bad debts expense to income summary. Post to the two T-accounts and keep running balances, assuming all accounts begin with a zero balance. (Post the December 31entry on the first line of the account and calculate the December 31balance on the second line of the account. Then post the closing entry on the third line of the account and calculate the January 1, 2017 balance on the last line of the account. Enter "0" on the normal side of the account for any zero balances.) Allowance for Bad Debts Bad Debts Expense 0 Jan. 1 2016 Bal. Jan. 1 2016 Bal. 0 12,600Dec. 31 (Adj.) Dec. 31 (Adj.) 12,600 12,600 Dec. 31 2016 Bal. Dec. 31 2016 Bal. 12,600 12,600Dec. 31 (Clos.) 12,600 Jan. 1 2017 Bal. Jan. 1 2017 Bal. 0 Now record the 2017 transactions in the journal. Jan.17: Sold inventory to Manny Vasquez, $ 700, on account. Ignore Cost of Goods Sold. To record sales the company will increase Cash for any cash sales, increase Accounts Receivable for sales on account, and will increase Sales Revenue for the total amount of sales (cash plus credit). In this case, this sale is on account. Use the information given to prepare the entry. (Record debits first, then credits. Select the explanation on the last line of the journal entry table.) Date Accounts and Explanation Debit Credit 2017 Accounts Receivable—Manny Vasquez 700 Jan. 17 Sales Revenue 700 Record sales on account. Jun. 29: Wrote off Manny Vasquez's account as uncollectible after repeated efforts to collect from him. Under the allowance method, the company will record a debit to Allowance for Bad Debts when writing off uncollectible receivables. Bad Debts Expense is not debited when a company writes off an account receivable when using the allowance method because the company will record the estimated bad debts expense as an adjusting entry. Go ahead and prepare the entry by debiting the Allowance for Bad Debts account and crediting the Accounts Receivable account. (Record debits first, then credits. Select the explanation on the last line of the journal entry table.) Date Accounts and Explanation Debit Credit 2017 Allowance for Bad Debts 700 Jun. 29 Accounts Receivable—Manny Vasquez 700 Wrote off uncollectible accounts. Aug. 6: Received $ 700 from Manny Vasquez, along with a letter apologizing for being so late. Reinstated Vasquez's account in full and recorded the cash receipt. To account for a recovery (when a customer decides to pay for a previously written-off receivable), the company must reverse the earlier write-off, and then will record the cash collection. To begin, we'll reverse the write-off by debiting Accounts Receivable and crediting Allowance for Bad Debts by the amount Recovered $700 . (Record debits first, then credits. Select the explanation on the last line of the journal entry table.)