As the accountant for Pure-Air Distributing, you attend a sales managers’ meeting devoted to a discussion of credit policies. At the meeting, you report that bad debts expense is estimated to be $59,000 and accounts receivable at year-end amount to $1,750,000 less a $43,000 allowance for doubtful accounts. Sid Omar, a sales manager, expresses confusion over why bad debts expense and the allowance for doubtful accounts are different amounts. Write a one-page memorandum to him explaining why a difference in bad debts expense and the allowance for doubtful accounts is not unusual. The company estimates bad debts expense as 2% of sales.
The difference exists between the balance of the allowance account and the bad debt expense account because the allowance account includes estimates of bad debts and bad debt expenses include the actual bad debts of the business entity that are compensated through the allowance account.
The amount that will not collect from the receivables is considered a bad debt of the business entity. These bad debts are considered expenses of the business entity.
To: Sales Manager
Subject: Difference in allowance for bad debt and bad debt expenses
When the business entity makes credit sales, an allowance account is created for bad debts. Two accounting methods are adopted for reporting bad debts:
Direct write-off method.
In the above situation, the balance in bad debt is $59,000, and the balance in the allowance for bad debt is $43,000. Such differences exist because the business entity first creates the allowance for bad debts by crediting them. The amount for such an account is calculated based on the estimated percentage of accounts receivables. This account is debited when the business entity determines actual bad debt expenses for the year. Debiting allowance will reduce the balance in the allowance account.
Jarden Company has credit sales of $3,600,000 for year 2017. On December 31, 2017, the company’s Allowance for Doubtful Accounts has an unadjusted credit balance of $14,500. Jarden prepares a schedule of its December 31, 2017, accounts receivable by age. On the basis of past experience, it estimates the percent of receivables in each age category that will become uncollectible. This information is summarized here.
2. Prepare the adjusting entry to record bad debts expense at December 31, 2017.
Each member of a team is to participate in estimating uncollectibles using the aging schedule and percents shown in Problem 7-3A. The division of labor is up to the team. Your goal is to accurately complete this task as soon as possible. After estimating uncollectibles, check your estimate with the instructor. If the estimate is correct, the team then should prepare the adjusting entry and the presentation of accounts receivable (net) for the December 31, 2017, balance sheet.
Daley Company estimates uncollectible accounts using the allowance method at December 31. It prepared the following aging of receivables analysis.
b. Prepare the adjusting entry to record bad debts expense using the estimate from part a. Assume the unadjusted balance in the Allowance for Doubtful Accounts is a $3,600 credit.
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