Question

Q.3. ACCOUNTS RECEIVABLE VALUATION:
The following accounts balances appear on Balance
Sheet of Asif & Co. as on December 31, 2016.
A/c. Receivable Rs.69,000
Allowance for bad debts Rs.3,450.
During the year 2017, bad debts written off amounted to
Rs.3,100, Total Sales (including Cash Sales of Rs.50,000)
amounted to Rs.1,30,000 and total cash received (including
recovery from previously written off account Rs.7,000)
amounted to Rs.76,000.-
The Company estimates bad debts at 5% of year end
Accounts Receivable.
REQUIRED:
(0) Record the above transactions in General Journal
Including year end adjusting entry.
Setup Accounts Receivable and Allowance for bad
debts account and complete in all respect.
(iii) Prepare Partial Balance Sheet as on Dec. 31, 2017.
MENTARY VALUATION:​

Answer 1

Answer:

Percentage-of-sales method The percentage-of-sales method estimates uncollectible accounts from the credit sales of a given period. In theory, the method is based on a percentage of prior years’ actual uncollectible accounts to prior years’ credit sales. When cash sales are small or make up a fairly constant percentage of total sales, firms base the calculation on total net sales. Since at least one of these conditions is usually met, companies commonly use total net sales rather than credit sales. The formula to determine the amount of the ending estimated bad debts entry is:

Bad Debt Expense = Net sales (total or credit) x Percentage estimated as uncollectible

To illustrate, assume that Rankin Company’s estimates uncollectible accounts at 1% of total net sales. Total net sales for the year were $500,000; receivables at year-end were $100,000; and the Allowance for Doubtful Accounts had a zero balance. Rankin would make the following adjusting entry at year end:

Dec.

31

Bad Debt Expense

Debit

5,000

Credit

Allowance for Doubtful Accounts 5,000

To record estimated uncollectible accounts

($500,000 X 1%).

Rankin reports Bad Debt Expense on the income statement. It reports the accounts receivable less the allowance among current assets in the balance sheet as follows:

Accounts receivable $100,000

Less: Allowance for doubtful accounts (5,000)

Accounts receivable, Net

$95,000

Or the balance sheet could show:

Accounts receivable (less estimated

uncollectible accounts, $5,000) $95,000

On the income statement, Rankin would match the bad debt expense against sales revenues in the period. We would classify this expense as a selling expense since it is a normal consequence of selling on credit.

Explanation:

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