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Methods for Accruing Bad Debts and Uncollectible Accounts

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Inc. reported the following amounts shortly before it made its year-end adjustments at June 30, 2005:

Sales $425,000
Sales Returns and Allowances 9,000
Cash Discounts 5,000
Accounts Receivable 43,000
Allowance for Doubtful Accounts 760 (Credit balance)

Answer each of the following independent questions concerning Cast, Inc.:

1. How do you know that Cast uses the allowance method?

2. If Cast estimates that uncollectible accounts will be 1% of net sales, prepare the adjusting entry.

3. If Cast estimates that uncollectible accounts will be 8% of gross accounts receivable, prepare the adjusting entry.

4. Assume that the $760 balance in the Allowance account is now a debit balance.
a. Prepare the adjusting entry using the 1% of net sales approach.

b. Prepare the adjusting entry using the 8% of gross accounts receivable approach.

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Solution Summary

Solution discusses the two methods for providing for bad debts and gives solution in T account format for easy visualization of the adjusting entry needed.

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I attached my responses so I could create a T acct for you so you can see what I did and how this all works!

Inc. reported the following amounts shortly before it made its year-end adjustments at June 30, 2005:

Sales $425,000
Sales Returns and Allowances 9,000
Cash Discounts 5,000
Accounts Receivable 43,000
Allowance for Doubtful Accounts 760 (Credit balance)

Answer ...

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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