[Leeann10100]

Richards Company uses the allowance method of accounting for bad debts. The following summary schedule was prepared from an aging of accounts receivable outstanding on December 31 of the current year.

No. of Days Outstanding Amount Probability of Collection
0–30 days $500,000 .98
31–60 days 200,000 .90
Over 60 days 100,000 .80

The following additional information is available for the current year:
Net credit sales for the year $4,000,000
Allowance for Doubtful Accounts:
Balance, January 1 45,000 (cr)
Balance before adjustment, December 31 2,000 (dr)

If Richards determines bad debt expense using 1.5 percent of net credit sales, the net realizable value of accounts receivable on the December 31 balance sheet will be:

Can anyone help with this problem I don't know where to start, what to do. :confused:

[morgaine300]

You're already aware of Peachy's thread on this:https://www.askmehelpdesk.com/accoun...ts-373310.html

There's lots of explanation over there. Go read through that and then come back and either show your attempts to work the problem, or ask whatever you don't understand.

[Leeann10100]

This question is completely different but I will try:
Net sales - 4,000,000 - 750,000 = 3,250,000
Balance - 3,250,000 - 45,000 = 3,205,000
Dec 31, 2007 - 45,000
where am I going wrong.

[morgaine300]

Let's start with the fact that there are two methods used to figure out the dollar amount that will be used in the year-end adjusting entry. (That's the $980 number in my "example" t account on the other thread.) We have not discussed anywhere how it is they come up with this number, and there are two methods to do that:

1) Aging of receivables or analysis of receivables. This is a balance sheet approach and is based on what is happening in the receivables account itself.
2) Percent of sales. That's an income statement approach and is based on what the credit sales for that one year were. It's also an easy, fairly straight-forward method.

The problem has unfortunately given you all the information to do both methods, meaning there's a lot of red herrings in there and you have to determine what you do and don't need. Notice the sentence that says "If Richards determines bad debt expense using..." That word "using" is important, because it's saying if they are using 1.5% of sales... so they want you to do the problem using the percent of sales method.

So, all that junk about the percents of the receivables balance and the $750,000... completely irrelevant to the problem. The $750,000 is what the net realizable value would be if you were using that method. But you're not.

Three points about your work. One, you wouldn't subtract the $750,000 from sales even if you were supposed to use that method, because they are not directly related. Remember that receivables is the amount customers owe at some specific point in time. Some of it could be from the past year, most from this year's sales, but most of the sales is probably already paid. So the receivables dollar amount and the sales dollar amount isn't directly related.

Second, the $45,000 was a balance from the beginning of the year. While that was relevant to the other problem where you needed to find missing numbers, it's not relevant to this one. We are at year-end and trying to determine what our current entry will be, and the beginning balance isn't relevant to that.

Third, you haven't done the calculation they asked for -- 1.5% of net credit sales.

Go back to the other thread and look at the examples. You will have a balance prior to doing the year-end adjusting entry. ($100 credit in my example.) Then look at the entry itself: you credit the allowance account. ($980) You will then re-balance that account to get an ending balance. ($1080) Also look again at how you determine net realizable value: receivables less the allowance. (That's not in my example cause I didn't give a receivables balance.)

So, all we actually need here is the amount to be used for the adjusting entry, so that we can re-balance that allowance account, so that we can figure out the net realizable value.

The entry is the percent of sales method, which is direct and straight-forward. You just figure out the percent of sales and that number is your adjusting entry. So just calculate that and plug it in.