[rpfinny]

The December 31, 2006 balance sheet of the Syran Company had Accounts Receivable of $650,000 and a credit balance in Allowance for Doubtful Accounts of $33,000. During the 2007, the following transactions occurred: Sales on account $1,420,000; sales returns and allowances, $100,000; collections from customers, $1,250,000; accounts written off, $35,000; previously written off accounts of #5,000 were collected.

(a) Journalize the 2007 transactions.
(b) If the company uses the percentage of receivables basis to estimate bad debt expense and determines that uncollectible accounts are expected to be 6% of accounts receivable, what is the adjusting entry at Decemeber 31, 2007?

[Just Looking]

Please read this announcement.

Announcement:

We can help you with this problem, but you are asked to show your work first. Don't worry if it is wrong to start as we will explain it to you, but first we need to know you tried and also we need to know where you are having problems. Your anwers will tell us where you need help. Thanks.

[rpfinny]

a) Account Receivable Debit: 1,420,000
Sales Credit: 1,420,000

Sales Returns & Allowances Debit: 100,000
Accounts Receivable Credit: 100,000

Cash Debit: 1,250,000
Account Receivable Credit 1,250,000

Allowance for Doubt Acc. Debit: 35,000
Accounts Receivable Credit: 35,000

Accounts Receivable Debit: 5,000
Allowance for Doubtful acc. Credit: 5,000
(To reverse write off)
Cash Debit: 5,000
Accounts Receivable Credit: 5,000
(To record collection)

b) Account receivable from:
2006 - 650,000 add
2007 - 1,420,000 = 2,070,000 - 100,000 (Sales return) = 1,970,000 - 1,250,000 (collections from customer) = 720,000 - 5000 (write off collected) = 715,000 (total account receivable)

Is this correct? This is the farthest I can go. I don't know how to the bad debt expense and the adjusting entry.

[Just Looking]

You did a good job on the journal entries. As for Part B, you are close. You also want to subtract the $35,000 in accounts receivable that were written off. The $5,000 that were originally written off and then subsequently collected won't affect the equation as you did both a dr and cr to the receivables account. Please ask if that is confusing and I'll explain it differently.

If you agree with the above, apply the 6% to your new balance to determine what the allowance account should be. You also need to determine what your allowance acccount is currently in the same way you did the accounts receivable balance. You will adjust the allowance account to the amount you determine it should be. If you'll show all your work again, we can check and make sure you understand.

[rpfinny]

2006 - 650,000 add
2007 - 1,420,000 = 2,070,000 - 100,000 (Sales return) = 1,970,000 - 1,250,000 (collections from customer) = 720,000 - 35,000 (write off) = 685,000 - 5000 (write off collected) = 680,000 (total account receivable)

Total A/R 680,000 x 0.06 = 40,800 <-- allowance for doubt account for 2007?

2007: 40,800 subtract
2006: 33,000 = 7,800?

Adjust entry for Dec 31:

Bad debt expense Debit 7,800
Allowance for Doubtful Accounts Credit 7,800

Could you explain to me about the write off why the 35,000 is included even though it hasn't been collected?

[rpfinny]

Wait, I think I messed up:

2007: 40,800 - 35,000 = 5,800
2006: 39,000 - 30,000 = 6,000 is this correct so far? From there I just subtract the difference which is
equal to 200. Is that my adjusting entry?

[Just Looking]

You are close again on the A/R balance. You are computing the current A/R balance - meaning you start with the beginning balance and adjust by your journal entries. The $35,000 entry was a credit to A/R which is why you include it. I think you misunderstood my comment about the $5,000 that had been written off and subsequently collected. Since it was both a debit to A/R when you reestablished the account and then a credit to A/R because it was paid, it does not belong in your calculation. Your balance should be $685,000 instead of $680,000 - another way to put it is that you would both add and subtract the $5,000.

That will of course affect the calculation for your desired Allowance. Your allowance at the end of 2006 was $33,000. However, you need to look at your entries in Part A. What is your unadjusted balance at the end of 2007? Just as you did with A/R, start with your allowance balance and adjust by your journal entries from Part A to get the current balance, and then make your entry to bring it to the desired amount.

[rpfinny]

my 2007 A/R is 685,000 x 0.06 = 41,100 is my allowance for doubtful accounts

so, 41,100 + 33,000 (2006 Allowance D/A) + 5,000 (recovery) - 35,000 (write off) = 44,100 is this correct for the ending balance for Allowance doubtful accounts?

Net realizable value of receivables is $685,000 - 44,100 = 640,900 is this correct?

[Just Looking]

No, not quite. You are confusing the issue by adding the $41,100. Look first at your unadjusted balance: 33,000 (2006 Allowance D/A) + 5,000 (recovery) - 35,000 (write off) = $3,000. You want your balance to be $41,100. What entry is needed?

[rpfinny]

I had that way before... have the 41,100 balance, but I wasn't sure. Thank you for helping on that part.
The entry should be:

Bad Debts Expense Debt 3,000
Allowance for D/A Credit 3,000 am I correct?

[Just Looking]

No. Your current balance in the allowance is $3,000. You want it to be $41,100. What would you have to do to make that happen? The way you have your entry now would result in an allowance of $6,000.

[rpfinny]

okay,

33,000 + 5000 (recovery) + 38,100 (bad debt) - 35,000 (write off) = 41,100.

Bad Debt Expense Debt 38,100
Allowance for D/A Credit 38,100 good?
(To adjust allowance accounts to
total estimated collectibles)

[Just Looking]

okay,

33,000 + 5000 (recovery) + 38,100 (bad debt) - 35,000 (write off) = 41,100.

Bad Debt Expense Debit 38,100
Allowance for D/A Credit 38,100 good?
(To adjust allowance accounts to
total estimated collectibles)

Perfect. :)

[rpfinny]

Thank you very much!

[Just Looking]

You're welcome. You did a good job working on this. :)