Percent of Sales Method
At the end of the current year, Accounts Receivable has a balance of $4,375,000; Allowance for Doubtful Accounts has a debit balance of $21,300; and sales for the year total $102,480,000. Bad debt expense is estimated at 1/4 of 1% of sales.
a. Determine the amount of the adjusting entry for uncollectible accounts.
$
256,200
b. Determine the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense.
Accounts Receivable $
4,375,000
Allowance for Doubtful Accounts $
21,300 (wrong)
Bad Debt Expense $
256,200
c. Determine the net realizable value of accounts receivable.
$(wrong)
4,353,700
c. To determine the net realizable value of accounts receivable, we need to subtract the allowance for doubtful accounts from the accounts receivable balance.
Net Realizable Value = Accounts Receivable - Allowance for Doubtful Accounts
= $4,375,000 - $21,300
= $4,353,700
To determine the amount of the adjusting entry for uncollectible accounts using the Percent of Sales Method, you need to follow these steps:
a. Calculate the bad debt expense by multiplying sales by the estimated rate. In this case, the estimated rate is 1/4 of 1%, which can be written as 0.0025 (0.25/100).
Bad debt expense = Sales * Estimated rate
Bad debt expense = $102,480,000 * 0.0025
Bad debt expense = $256,200
So, the amount of the adjusting entry for uncollectible accounts is $256,200.
b. To determine the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense, you need to take into account the initial balances and adjust them with the new amounts.
Accounts Receivable:
The balance of Accounts Receivable remains unchanged at $4,375,000.
Allowance for Doubtful Accounts:
To determine the adjusted balance, you subtract the bad debt expense from the debit balance in the Allowance for Doubtful Accounts.
Adjusted balance of Allowance for Doubtful Accounts = Initial balance - Bad debt expense
Adjusted balance of Allowance for Doubtful Accounts = $21,300 - $256,200
Adjusted balance of Allowance for Doubtful Accounts = -$234,900 (this is a credit balance)
Bad Debt Expense:
As calculated in part a, the bad debt expense is $256,200.
c. To determine the net realizable value of accounts receivable, you need to subtract the balance of the Allowance for Doubtful Accounts from the balance of Accounts Receivable.
Net realizable value of accounts receivable = Accounts Receivable - Allowance for Doubtful Accounts
Net realizable value of accounts receivable = $4,375,000 - (-$234,900)
Net realizable value of accounts receivable = $4,609,900.