[Peachey]

Based on the aging of its accounts receivable at December 31, Ribbon Company determined that the net realizable value of the receivables at that date is $760,000. Additional information is as follows:

Accounts Receivable at December 31 ……………………$ 880,000
Allowance for Doubtful Accounts at January 1………….……………128,000 (cr)
Accounts written off as uncollectible during the year………………… 88,000

Ribbon’s doubtful accounts expense for the year ended December 31 is

This is my working where am I going wrong:

The net realizable value of accounts receivable will be
Gross amount receivable... $880,000
Allowance for doubtful accounts... ($88,000)
Net realizable value... $792,000

Please help me.

[Baphat188]

Bhorjraj Company uses the aging approach to estimate bad debt expense . The of each account received is aged of three times period as follows:(1) not yet due 250,000 2. up to 120 days past due 50 ,000 and 3. more than 120 days pays due 30,000 . Expencience has shown that for each age group , the average loss rate on the amount of the receivables at year end due to uncollectability is 3.5 percent, 10 percent , 30 percent respectively. At dec 31 20 the allowance for doubtful balance was $400 credit before the end of the period adjusting entry .


Question : prepare the bad debt expense adjusting entry for year 2010
2. how show should it be shown on 2010 balance sheet

[morgaine300]

This is my working where am i going wrong:

The net realizable value of accounts receivable will be
Gross amount receivable .........................$880,000
Allowance for doubtful accounts................($88,000)
Net realizable value................................. $792,000

Please help me.

Yeah, you don't want to be doing this, cause you're mixing up dates. The $880,000 receivable balance is as of 12/31 and net realizable value for that date is already given as 760,000. So the 792,000 can't be correct. The $88,000 was during the year so that is not going to affect an ending balance.

The dates are confusing and this is what I did, cause it was the only way I could figure it out. I made myself two t accounts, one for receivables and one for allowance. Let's see -- I can insert an image in here, right? Let me try.

You want to do the steps I outlined. Copy everything on paper and try to answer the three parts and see what you come up with. You can't draw a t account (I cheated and used a program from work), so you can just show the math of what you do.

This type of problem is easier if you set everything up (many people find using the t account easier), insert what you already know where it belongs, and then start working towards what you don't know.

Give it a shot.

[morgaine300]

Baphat, please submit your own questions in a new thread of your own. Also, we are not here to just answer your homework questions for you. You should always include any of your own attempts at doing the problem also.

[Peachey]

Ok on Dec 31 I got 632,000 ending balance.
Dountful account Dec 31.
880,000 - 632,000 - 88,000 = 160,000
Am I wrong again.

[morgaine300]

You are first of all making the same error you made before. 880,000 is an ending balance. You cannot take anything that happened during the year and have it affect the ending balance. Just for example, let's say the ending balance in your checking account at the end of 2008 was $150. And you wrote a check during December of $30. You wouldn't subtract the $30 check from the ending balance, would you? Subtracting the $30 check was how you got to that ending balance. (i.e. it was $180, you subtract the check, and you end up at $150 balance.)

But that's what you're trying to do. The 880,000 is at the end of the year, and the 88,000 of written off accounts happened during the year - it came out of the account already, so you can't subtract it out again.

I'm also not sure where you're coming up with the 632,000 because you didn't show your math.

Perhaps it's not understanding what the net realizable value is? That's receivables less the bad debt allowance. (It's the amount of the receivables you think you will actually collect.) So we could make this:
880,000 - allowance = 760,000
They've given the answer (NRV) and making you figure out what the allowance balance must have been to get to that number.

Let's get that part down before going on. I'll check back in a bit to see how that's gone, and then explain a bit more about how the allowance account works. (Or whoever gets here first.) I'm also not on my own computer and can't do my little t account pictures & such.

[Leeann10100]

Ok I will try again thank you for the patience:
880,000 - 120,000 = 760,000

[Peachey]

Sorry Mr morgaine300 but the whole class is at my home, leeann is also a classmate and a new member I had to tell her the rules. Get her own thread.

[morgaine300]

That's OK. Leeann's answer is correct. Do you see where that is coming from? NRV is the amount they think they will collect, and if that's 760,000, then the amount they think they won't collect must be 120,000. (pretty high %)

Now that I'm back home on my own computer I can do my t account images again. So let me show you what the allowance account does. In a way the "process" actually starts at the end of the year with the adjusting entry; however, we have to look at what happens during a year. Think of the beginning balance as the amount they've "set aside" for that year's write-off's. Those aren't specific customers - it's just a guestimate of the dollar amount. That's why we keep it in a contra account and use that to offset the balance of the receivables, because these aren't particular accounts and therefore we can't remove them from A/R.

When an actual account is written off (say, we get a bankruptcy notice), we now know a specific account. So we pull it out of A/R, and we also pull that amount out of the allowance account. If you think of that allowance account as "set aside" for the write off's, then when they happen we take it out of there because that's one knocked off. And we keep doing this all year. (In reality, these would have to be written off individually, but your problem is giving you a lump total that was written off during the year.) This write-off entry is:
Dr. Allowance for Bad Debt
Cr. Acct Receivable - John Doe Co.

By the end of the year you've "used up" what you sat aside for write off's and the balance will be down lower. It's not going to be at zero but it'll be down lower or even have gone negative. Then at the end of the year we make a new estimate based on that current year, make an adjusting entry of it, and the balance goes right back up again, ready to start a new year. That entry:
Dr. Bad Debt Expense
Cr. Allowance for Bad Debt

Notice we're expensing that part. The expense will go with that year only and be closed out with the other expenses. The allowance account balance carries over into the next year. The important part to note is that the entry to that account (not the balance) is the same as the expense. The problem is asking for the expense, but you are going to find it through that entry to the allowance account. And you have to play with the numbers and do a little backwards work to do that. (I find problems of "find the missing number" annoying and unproductive.)

Try to follow the t accounts, along with the explanation above.

[rehmanvohra]

Allowance required ($880,000 - 760,000) = $120,000
Balance in allowance account ($128,000 - 88,000) 40,000
Bad debts expense for the year $80,000

[Peachey]

Thank you a lot the both of you. I got it.

[Leeann10100]

Thank you a lot also.

[morgaine300]

I am SO glad I went to all that trouble to try to get someone to actually understand the concepts -- wow, I could have just told them the answer.

Sigh.

[Leeann10100]

No! Morgain300 sir peachey write down all the explanations so please don't say that. We are here to learn.

[morgaine300]

Thanks, Arc.