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The document describes a trial balance for Darby Antiques that shows accounts receivable of €385,000 and an allowance for doubtful accounts of €1,000. It asks how to determine which bad debt accounting method is being used, how to prepare adjusting entries under different assumptions, and how the allowance for doubtful accounts account affects financial reporting.

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95 views3 pages

Pa 2

The document describes a trial balance for Darby Antiques that shows accounts receivable of €385,000 and an allowance for doubtful accounts of €1,000. It asks how to determine which bad debt accounting method is being used, how to prepare adjusting entries under different assumptions, and how the allowance for doubtful accounts account affects financial reporting.

Uploaded by

vi ngels
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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P8-5 At December 31, 2020, the trial balance of Darby Antiques contained thefollowing

amounts before adjustment.


Debit Credit
Accounts Receivable €385,000
Allowance for Doubtful Accounts € 1000
Sales Revenue 970,000

Instructions
(a) Based on the information given, which method of accounting for bad debts is
Roberto using—the direct write-off method or the allowance method? How
can you tell?
(b) Prepare the adjusting entry at December 31, 2020, for bad debt expense
under each of the following independent assumptions.
(1) An aging schedule indicates that €11,750 of accounts receivable will be
uncollectible.
(2) The company estimates that 1% of sales will be uncollectible.
(c) Repeat part (b) assuming that instead of a credit balance there is an €960
debit balance in Allowance for Doubtful Accounts.
(d) During the next month, January 2021, a €3,000 account receivable is written
off as uncollectible. Prepare the journal entry to record the write-off.
(e) Repeat part (d) assuming that Roberto uses the direct write-off method
instead of the allowance method in accounting for uncollectible accounts
receivable.
(f) What type of account is Allowance for Doubtful Accounts? How does it affect
how accounts receivable is reported on the statement of fi nancial position at
the end of the accounting period?

ANSWER
a) the allowance method. Since the balance in the allowance for
doubtful accounts is given, they must be using this method because
the account would not exist if they were using the direct write-off
method.
b) (1) Dec. 31 Bad Debt Expense
($11,750 – $800 11,600
Allowance for Doubtful
Accounts 11,600
(2) Dec. 31 Bad Debt Expense
($19,000 X 1%) 9,180
Allowance for Doubtful
Accounts 9,180
c) (1) Dec. 31 Bad Debt Expense
($12,400 + $800 13,200
Allowance for Doubtful
Accounts 13,200
(2) Dec. 31 Bad Debt Expense 9,180
Allowance for Doubtful
Accounts 9,180

d) Allowance for Doubtful Accounts ................................ 3,000


Accounts Receivable ...................................... 3,000
Note: The entry is the same whether the amount of bad debt expense at the
end of 2014 was estimated using the percentage-of-receivables or the
percentage-of-sales method.
e) Bad Debt Expense....................................................... 3,000
Accounts Receivable ................................................ 3,000
f) Allowance for Doubtful Accounts is a contra-asset account. It is
subtracted from the gross amount of accounts receivable so that
accounts receivable is reported at its cash realizable value.

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