Bad debt and the allowance for doubtful accounts.
Normandale Brewing and Distilling Company’s post closing trial balance on December 31, 2009 In other words, at the beginning of 2010 reflects the following balances:
Accounts receivable $300,000
Allowance for doubtful accounts $35,000
Sales for 2010 were $5,500,000. All sales were sales on account. At the end of each month throughout 2010, Bobby Bookkeeper posted a journal entry recording bad debt expense for an amount equivalent to 75% (three quarters of one percent) of monthly sales, using the percentage of sales method. During 2009 collections of accounts receivable were $4,300,000.
A. Provide a journal entry to summarize the 12 monthly journal entries posted by the Bobby Bookkeeper throughout 2010 to record bad debt expense.
B. Provide a journal entry to summarize the collections of accounts receivable throughout 2010.
C. What is the amount of accounts receivable on December 31, 2010 according to general ledger?
D. What is the amount of the allowance for doubtful accounts as of December 31, 2010?
On January 15, 2011, Andy Auditor arrives on the scene and asks to see an aging schedule of the accounts receivable as of December 31, 2010. Bobby Bookkeeper provides an aging schedule showing that:
- 10% of the receivables are older than 60 days,
- 20% of the receivables are between 31 and 61 days old, and
- 70% of the receivables were less than 30 days old.
Upon analysis of the $300,000 of accounts receivable, Andy sees:
- Invoice # M45987 dated December 15, 2010 in the amount of $10,000, receivable from Denny Hecker, who is in prison pending trial for his multi-million fraud.
- Invoice #C98785 dated March 2, 2010 in the amount of $20,000 receivable from Trevor Cook who is in prison serving a 150 year term for fraud.
Andy and Bobby discuss these invoices and decide they should be written off as of December 31, 2010.
E. Provide the journal entry that Bobby will post to prepare off these accounts.
Andy and Bobby decide that of the residual accounts receivable (after the prepare-offs taken in E above) 1% of the receivables that are not past due must be estimated as uncollectible, 5 % of the receivables that are past due but less than 61 days old must be estimated as uncollectible, and 50% of the receivables that are more than 60 days past due must be estimated as uncollectible
F. Make a revised aging schedule showing ages of accounts receivable after the prepare-offs. Be very careful with your dates. [Hint: Be sure to reflect the prepare-offs taken in E above, in the correct age category.
G. Pass the journal entry that Bobby will post to adjust bad debt expenditure and the allowance for doubtful accounts as of December 31, 2010.