302323 Flashcards
Pagel Corporation uses the allowance method of accounting for uncollectible accounts. At the beginning of 20X6, Pagel’s Allowance for Doubtful Accounts account had a credit balance of $54,750. During 20X6, write-offs of Accounts Receivable totaled $56,300. Pagel estimates its bad debt expense using the percentage-of-receivables (aging) method. The outstanding Accounts Receivable at December 31, 20X6, totaled $1,780,000 and the historical level of uncollectible accounts is 3%.
How much should Pagel record for Bad Debt Expense at December 31, 20X6?
$51,850
$54,590
$53,400
$54,950
$54,950
Because Pagel uses the percentage-of-receivables method, the ending balance in the Allowance for Doubtful Accounts account needs to be $53,400 ($1,780,000 × .03). After all the accounts are written off, the balance in the Allowance for Doubtful Accounts account will be a debit of $1,550 ($54,750 − $56,300). In order for the ending balance to be $53,400, Pagel must record an adjusting entry with a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts for $54,950 ($53,400 + $1,550).
Allowance for Doubtful Accounts:
January 1, 20X6, balance $54,750
Less write-offs in year 20X6 (56,300)
Balance before adjustment (debit balance) ($1,550)
Required ending balance for allowance for
doubtful accounts $53,400
Adjustment needed: amount of bad debt expense $54,950
Bad Debt
A bad debt is a receivable that is considered to be uncollectible. The loss in the valuation of receivables should be recognized for financial accounting purposes when the original revenue is earned even if the specific uncollectible receivables cannot be identified. For tax purposes, the loss in valuation of receivables should be recognized when the specific receivable becomes worthless.
For tax purposes, bad debts that a taxpayer incurs, and that did not arise in the course of operating a trade or business by the taxpayer, are nonbusiness bad debts. To be deductible, nonbusiness bad debts must be totally worthless. A partly worthless nonbusiness bad debt cannot be deducted. Nonbusiness bad debts are treated as short-term capital losses. (IRC Section 166)
Business bad debts that become wholly worthless during the tax year are deductible. Business bad debts that are partially worthless may be partially deductible according to IRC Section 166.
2221.08
Balance sheet approach: This approach emphasizes the net realizable value of accounts receivable at the end of the period rather than the amount of uncollectible accounts expense. The two most common forms of the balance sheet approach are as follows:
- Percentage of outstanding accounts receivable
- Aging of accounts receivable
The first form bases the accounting for uncollectible accounts on an estimate of the percentage of year-end accounts receivable that will prove to be uncollectible. The percentage is based on previous experience. The second form, aging of accounts receivable, requires the enterprise to set up an aging schedule. The aging schedule identifies how long each account has been outstanding and relates the likelihood of collection to the age of the receivable.
2221.09
Question #302323
Incorrect
Because Pagel uses the percentage-of-receivables method, the ending balance in the Allowance for Doubtful Accounts account needs to be $53,400 ($1,780,000 × .03). After all the accounts are written off, the balance in the Allowance for Doubtful Accounts account will be a debit of $1,550 ($54,750 − $56,300). In order for the ending balance to be $53,400, Pagel must record an adjusting entry with a debit to Bad Debt Expense and a credit to Allowance for Doubtful Accounts for $54,950 ($53,400 + $1,550).
Allowance for Doubtful Accounts:
January 1, 20X6, balance $54,750
Less write-offs in year 20X6 (56,300)
Balance before adjustment (debit balance) ($1,550)
Required ending balance for allowance for
doubtful accounts $53,400
Adjustment needed: amount of bad debt expense $54,950
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Video Links
FAR 2B - Accounts Receivable - Allowance Methods - Practice Questions
FAR 2B - Accounts Receivable Allowance Methods
FAR 2B - Accounts Receivable Net Realizable Value
FAR 2B - Converting Notes Receivable to Cash
FAR 2B - Converting Notes Receivable to Cash - Practice Questions
FAR 2B - Converting Receivables to Cash - Practice Questions
FAR 2B - Notes Receivable
FAR 2B - Notes Receivable Practice Questions
Relevant Terms
Bad Debt
Reference
2221.08
2221.09
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Reference: 2221.09
To illustrate the methods involved, assume the following data for Delta Company:
Sales:
Credit sales $300,000
Cash sales 200,000
$500,000
========
Accounts receivable, end of year: $60,000
Allowance for uncollectible accounts,
before adjusting entry (credit) 800
The adjusting entry at the end of the year under the various methods, given the assumptions stated, is presented as follows:
Income statement approach. Past experience indicates that 1% of credit sales will prove to be uncollectible.
Uncollectible Accounts Expense 3,000
Allowance for Uncollectible Accounts 3,000
The entry is based on 1% of credit sales of $300,000.
Balance sheet approach—percentage of receivables. Past experience indicates that 6% of the year-end accounts receivable will prove to be uncollectible.
Uncollectible Accounts Expense 2,800
Allowance for Uncollectible Accounts 2,800
The amount is computed as follows:
Desired credit balance in allowance (6% of $60,000) $(3,600)
Less: Credit balance in allowance before adjustment (800)
Debit (credit) to allowance needed $(2,800)
=======
Balance sheet approach—aging of receivables. First, each individual account is aged to determine how long it has been outstanding. Second, an estimated loss percentage is developed for each age category based on past experience and the advice of credit department personnel. The summarized information for Delta Company is presented as follows:
Receivable
Balance Under 31-60 61-90 Over
Dec. 31 30 Days Days Days 90 Days Aaron $ 1,000 $ 1,000 Blue 500 $ 500 Farley 2,000 $ 2,000 Jacobs 3,000 3,000 Zebo 900 $ 900 Totals $60,000 $45,000 $10,000 $4,000 $1,000
======= ======= ======= ====== ====== Percentage estimated uncollected 4% 7% 15% 40%
======= ======= ====== ====== Estimated uncollectible $ 3,500 $ 1,800 $ 700 $ 600 $ 400
======= ======= ======= ====== ======
The adjusting entry is:
Uncollectible Accounts Expense 2,700
Allowance for Uncollectible Accounts 2,700
The amount is computed as follows:
Desired credit balance in allowance $(3,500)
Less: Credit balance in allowance before adjustment (800)
Debit (credit) to allowance needed $(2,700)
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2221.09
2221.09
