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Question: P7-5

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Intermediate Accounting (Kieso)
Found in: Page 372

Short Answer

(Bad-Debt Reporting) Presented below is information related to the Accounts Receivable accounts of Gulistan Inc. during the current year 2017.

1. An aging schedule of the accounts receivable as of December 31, 2017, is as follows.

Age

Net Debit Balance

% to be applied after correction is made

Under 60-days

$172,342

1%

60-90 days

136,490

3%

91-120 days

39,924

6%

Over 120 days

23,644

$3,700 definitely uncollectible; estimated remainder uncollectible is 25%

$372,400

*The $3,240 write-off of receivables is related to the 91-to-120 day category.

2. The Accounts Receivable control account has a debit balance of $372,400 on December 31, 2017.

3. Two entries were made in the Bad Debt Expense account during the year: (1) a debit on December 31 for the amount credited to Allowance for Doubtful Accounts, and (2) a credit for $3,240 on November 3, 2017, and a debit to Allowance for Doubtful Accounts because of a bankruptcy.

4. Allowance for Doubtful Accounts is as follows for 2017.

Allowance for Doubtful Accounts

Nov 3

Uncollectible accounts written off

3,240

Jan 1

Beginning balance

8,750

Dec 31

5% of $372,400

18,620

5. A credit balance exists in Accounts Receivable (60–90 days) of $4,840, which represents an advance on a sales contract.

Instructions

Assuming that the books have not been closed for 2017, make the necessary correcting entries.

The adjusting balance is $7,279.64.

See the step by step solution

Step by Step Solution

Definition of Aging Method

A method used to determine the amount of receivables that will be uncollectible is known as aging method. Under this method, different time buckets are prepared to sort receivables.

Correcting Journal Entries

Date

Accounts and Explanation

Debit $

Credit $

1

Bad debt expenses

$3,240

Accounts receivables

$3,240

2

Accounts receivable

$4,840

Advance sale contracts

$4,840

3

Allowance for doubtful accounts

$3,700

Accounts receivables

$3,700

4

Allowance for bad debt expenses

$7,279.64

Bad debt expenses

$7,279.64

Working Note:

Age

Net Debit Balance

% to be applied after correction is made

Amount $

Under 60-days

$172,342

1%

$1,723.42

60-90 days

$141,330

3%

$4,239.90

91-120 days

36,684

6%

$2,201.04

Over 120 days

19,944

$3,700 definitely uncollectible; estimated remainder uncollectible is 25%

$4,986

$372,400

$13,150.36

Particular

Amount $

Reported balance

$20,430

Less: Correct balance

(13,150.36)

Adjustment

7,279.64

  • If the business entity has not made the journal entry for $3,700 receivables written off earlier, then following changes will be reported in the problem:

Age

Net Debit Balance

% to be applied after correction is made

Amount $

Under 60-days

$172,342

1%

$1,723.42

60-90 days

$141,330

3%

$4,239.90

91-120 days

36,684

6%

$2,201.04

Over 120 days

19,944

25%

$ 8,686

$372,400

$16,850.36

Particular

Amount $

Reported balance

$24,130

Less: Correct balance

(16,850.36)

Adjustment

7,279.64

Note: A journal entry will be made to write off $3,700 after adjusting entries have been made.

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