Q20E - Horngren'S Financial And Managerial Accounting

Question

Accounting for uncollectible accounts using the allowance method (aging-of-receivables) and reporting receivables on the balance sheet.

At December 31, 2018, the Accounts Receivable balance of GPS Technology is \(200,000. The Allowance for Bad Debts account has a \)24,110 debit balance. GPS Technology prepares the following aging schedule for its accounts receivable:

Age of Accounts
	1–30 Days	31–60 Days	61–90 Days	Over 90 Days
Accounts Receivable	\( 65,000	\) 50,000	\(40,000	\)45,000
Estimated percent uncollectible	0.4%	3.0%	5.0%	48.0%

 

Requirement:

1. Journalize the year-end adjusting entry for bad debts on the basis of the aging schedule. Show the T-account for the Allowance for Bad Debts at December 31, 2018.

2. Show how GPS Technology will report its net accounts receivable on its December 31, 2018, balance sheet

Step-by-Step Solution

Answer

1. Journal entry and T account is recorded in Step 2. 
2. The net realizable value is $174,640.

Step 1: Definition of bad-debt expense

The bad debt expense refers to the outstanding amount from the customers end, which remains uncollectible.

Step 2: Journalizing of bad-debt expense and preparation of T-Account

$\begin{array}{c}\mathbf{Bad}\mathbf{-}\mathbf{Debt}\mathbf{Expense}\mathbf{=}\mathbf{Target}\mathbf{Balance}\mathbf{+}\mathbf{Unadjusted}\mathbf{Balance}\\ \mathbf{=}\left(\begin{array}{l}(\$65,000\times 0.4\%)+(\$50,000\times 3\%)\\ +(\$40,000\times 5\%)+(\$45,000\times 48\%)\end{array}\right)\mathbf{+}\mathbf{\$}\mathbf{24}\mathbf{,}\mathbf{110}\\ =(\$260+\$1,500+\$2,000+\$21,600)+\$24,110\\ =\$25,360+\$24,110\\ =\$49,470\end{array}$

Date	Particulars	Debit	Credit
	Bad Debts	$49,470
	Allowance for Bad Debts		$49,470
	(Being entry to record bad debts expense)

Allowance for Bad Debts
Balance	$24,110	$49,470	Adjustments
		$25,360	Ending Balance

Step 3: Calculation of net realizable value

GPS Technology Partial Balance Sheet As of December, 2018
Accounts Receivable	$200,000
Less: Allowance for Bad Debts	($25,360)
Net Realizable Value	$174,640