8SE - Horngren'S Financial And Managerial Accounting

Question

Applying the allowance method (aging-of-receivables) to account for Uncollectibles Surf and Sun had the following balances at December 31, 2018, before the year-end adjustments:

Accounts Receivable

81,000

 

Allowance for Bad Debts

Bal. \( 2,063

 

The aging of accounts receivable yields the following data:

 

	Age of Accounts Receivable
	0–60 Days	Over 60 Days	Total Receivables
Accounts Receivable	\) 78,000	\( 3,000	\) 81,000
Estimated percent uncollectible	*2%	* 23%

 

Requirements        

1. Journalize Surf and Sun’s entry to record bad debts expense for 2018 using the aging-of-receivables method.

2. Prepare a T-account to compute the ending balance of Allowance for Bad Debts.

Step-by-Step Solution

Answer

(1) Bad debts will be debited, and allowance for bad debts will be credited by $187, respectively.

(2) Ending balance for allowance for bad debts equals $2,250. 

Step 1: Definition of Aging-of-receivables:

Aging-of-receivables method computes bad debts expense by applying a different percentage for each aging category of accounts receivable.

Step 2: Journalize the transactions of Lake

  $\begin{array}{rcl}\mathrm{Bad} \mathrm{Debts} \mathrm{Expense}& =& \mathrm{Uncollectible} \mathrm{of} 0-60 \mathrm{Days}+ \mathrm{Uncollectible} \mathrm{of} \mathrm{over} 60 \mathrm{days}\\ & & -\mathrm{Unadjusted} \mathrm{Balance}\\ & =& \left(\$78,200\times 2\%\right)+\left(\$3,000\times 23\%\right)-\$2,063\\ & =& 2,250-\$2,063\\ & =& \$187\end{array}$

Date	Account and explanation	Debit	Credit
2018	Bad Debts	$187
	Allowance for Bad Debts		$187
	(Recording of bad debts expense for the period)

Step 3: T-account of the ending balance of Allowance for Bad Debts

Allowance for Bad Debts

		$2,063	Beg. Balance
		$187	Adj.
		$ 2,250	End. Balance