Chap007wildtextbook(1)

Estimating bad debts expense 7 18 barton has credit

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Estimating Bad Debts Expense 7-18
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Barton has credit sales of $1,400,000 in 2011. Management estimates 0.5% of credit sales will eventually prove uncollectible. What is Bad Debts Expense for 2011? Percent of Sales Method Bad debts expense is computed as follows: 7-19 Current Period Sales × Bad Debt % = Estimated Bad Debts Expense
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Barton’s accountant computes estimated Bad Debts Expense of $7,000. Percent of Sales Method 7-20 1,400,000 $ × 0.50% = 7,000 $ DR CR Dec. 31 Bad Debts Expense 7,000 Allowance for Doubtful Accounts 7,000 To record estimated bad debts
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Œ Compute the estimate of the Allowance for Doubtful Accounts. Bad Debts Expense is computed as: Percent of Accounts Receivable Method 7-21 Year-end Accounts Receivable × Bad Debt % Estimated Adj. Bal. in Allowance for Doubtful Accounts - Unadj. Year-End Bal. in Allowance for Doubtful Accounts = Estimated Bad Debts Expense
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Barton has $100,000 in accounts receivable and a $900 credit balance in Allowance for Doubtful Accounts on December 31, 2011. Past experience suggests that 4% of receivables are uncollectible. What is Barton’s Bad Debts Expense for 2011? Percent of Accounts Receivable 7-22
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Desired balance in Allowance for Doubtful Accounts. Percent of Accounts Receivable 7-23 100,000 $ × 4.00% = 4,000 $ 900 3,100 4,000 Allowance for Doubtful Accounts DR CR Dec. 31 Bad Debts Expense 3,100 Allowance for Doubtful Accounts 3,100 To record estimated bad debts
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Œ Each receivable is grouped by how long it is past its due date. Ž Estimated bad debts for each group are totaled. Aging of Accounts Receivable Method Each age group is multiplied by its estimated bad debts percentage. 7-24
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Œ Aging of Accounts Receivable Ž 7-25 Barton, Co. Schedule of Accounts Receivable by Age December 31, 2011 Days Past Due Accounts Receivable Balance Percent Uncollectible Estimated Uncollectible Amount Not Yet Due 64,500 $ 1% 645 $ 1 - 30 Days Past Due 18,500 3% 555 31 - 60 Days Past Due 10,000 7% 700 61 - 90 Days Past Due 3,900 40% 1,560 Over 90 Days Past Due 3,100 60% 1,860 100,000 $ 5,320 $
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Barton’s unadjusted balance in the allowance account is $900. We estimated the proper balance to be $5,320. Aging of Accounts Receivable 7-26 900 4,420 5,320 Allowance for Doubtful Accounts DR CR Dec. 31 Bad Debts Expense 4,420 Allowance for Doubtful Accounts 4,420 To record estimated bad debts
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With the allowance method, when an account is determined to be uncollectible, the debit goes to Allowance for Doubtful Accounts . Writing Off a Bad Debt Barton determines that Martin’s $300 account is uncollectible. 7-27 DR CR Dec. 31 Allowance for Doubtful Accounts 300 Accounts Receivable - Martin 300 To write-off an uncollectible account
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Subsequent collections on accounts written off require that the original write-off entry be reversed before the cash collection is recorded.
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