Exercise 8-3

at the beginning of the current period, griffey corp. had balances in accounts receivable of $200,000 and in allowance for doubtful accounts of $9,000 (credit). during the period, it had net credit sales of $800,000 and collections of $763,000. it wrote off as uncollectible accounts receivable of $7,300. however, a $3,100 account previously written off as uncollectible was recovered before the end of the current period. uncollectible accounts are estimated to total $25,000 at the end of the period.

(a) prepare the entries to record sales and collections during the period.

(b) prepare the entry to record the write-off of uncollectible accounts during the period.

(c) prepare the entries to record the recovery of the uncollectible account during the period.

(d) prepare the entry to record bad debt expense for the period.

(a) Prepare the entries to record sales and collections during the period.

Dr Accounts receivable$ 800,000

Cr Sales$ 800,000

Dr CASH$ 763,000

Cr Accounts receivable$ 763,000

(b) Prepare the entry to record the write-off of uncollectible accounts during the period.

Dr Allowance for Uncollectible Accounts$ 7,300

Cr Accounts receivable$ 7,300

(c) Prepare the entries to record the recovery of the uncollectible account during the period.

Dr Accounts receivable$ 3,100

Cr Allowance for Uncollectible Accounts$ 3,100

(d) Prepare the entry to record bad debt expense for the period.

Dr Bad Debt Expense$ 20,200

Cr Allowance for Uncollectible Accounts$ 20,200

Explanation:

If the company applies the allowance method, it means that the account Allowance for Uncollectible Accounts must show as balance the estimated value of $25,000

Because the company already has a CREDIT balance in the Allowance for Doubtful Accounts it's necessary to register an entry that complement the existing value and reflect the estimated value, $ 20,200  

Bad accounts are those credits granted by the company and there is no possibility of being charged.

When customers buy products on credits but the company cannot collect the debt, then it's necessary to cancel the unpaid invoice as uncollectible.

One way is to directly cancel bad debts at the time it was decided that the credit is bad, the total amount reported as bad debt expenses negatively affect the income statement and the accounts receivable are reduced by the same amount, less assets

The other way is to determine a percentage of the total amount of accounts receivable as bad debts, there are many ways to analyze accounts receivable and calculate the value of bad debts.

When the company has the percentage of uncollectible accounts, the required journal entry is Bad Expenses (debit) with Reserve for Bad Accounts (credit)

At the time of cancellation, since the expenses were recognized before, we only use the Allowance for Uncollectible Accounts (Debit)  with accounts receivable (credit), with this we are recognizing the bad credit of the company.