Chapter 8: 7SE (page 467)

Applying the allowance method (percent-of-receivables) to account for Uncollectibles
The Accounts Receivable balance for Lake, Inc. at December 31, 2017, was $20,000. During 2018, Lake earned revenue of $454,000 on account and collected $325,000 on account. Lake wrote off $5,600 receivables as uncollectible. Industry experience suggests that uncollectible accounts will amount to 5% of accounts receivable.
Requirements
1. Assume Lake had an unadjusted $2,700 credit balance in Allowance for Bad Debts at December 31, 2018. Journalize Lake’s December 31, 2018, adjustment to record bad debts expense using the percent-of-receivables method.
2. Assume Lake had an unadjusted $2,400 debit balance in Allowance for Bad Debts at December 31, 2018. Journalize Lake’s December 31, 2018, adjustment to record bad debts expense using the percent-of-receivables method

Expert verified

Percent-of-receivables:

Percent-of-receivables method computes bad debts expense as a percentage of Ending balance of accounts receivable.

Bad Debts expenses = Ending balance of accounts receivable* % (estimated) +/ - Unadjusted debit/credit balance of Allowance for Bad Debts

Ending balance of accounts receivable = $20,000+$ 454,000 - $ 325,000 - $ 5,600

= 1,43,400

Step by step solution

Bad Debts expenses = $143,400* 5% - $2,700

= $ 7,170 - $ 2,700

= $ 4,470

Date	Account and explanation	Debit	Credit
2018
	Accounts receivable Sales Revenue (Sold goods on account)	$ 454,000	$ 454,000
	Cash Sales Revenue (Sold goods on account)	$ 325,000	$ 325,000
	Allowance for Bad Debts Accounts Receivable (Wrote off an uncollectible account)	$ 5,600	$ 5,600
	Bad Debts Allowance for Bad Debts Recorded bad debts expense for the period.	$ 4,470	$ 4,470

Bad Debts expenses = $143,400* 5% + $2,400

= $ 7,170 + $ 2,400

= $ 9,570

Date	Account and explanation	Debit	Credit
2018
	Accounts receivable Sales Revenue (Sold goods on account)	$ 454,000	$ 454,000
	Cash Sales Revenue (Sold goods on account)	$ 325,000	$ 325,000
	Allowance for Bad Debts Accounts Receivable (Wrote off an uncollectible account)	$ 5,600	$ 5,600
	Bad Debts Allowance for Bad Debts Recorded bad debts expense for the period.	$ 9,570	$ 9,570