Demonstration Problem
The Demonstration Problem below includes an Action Plan. Once you have completed the
problem, you can compare your results with the solution provided.
At July 31, 2006, Ottawa Co. reported the following information on its balance sheet:
Accounts Receivable
$90,000
Less: Allowance for Doubtful Accounts
8,000
During the year ended July 31, 2006, the company had the following transactions related to
receivables:
1.
Total sales, all on account
$309,000
2.
Sales returns and allowances, all on account
3.
Collections of accounts receivable, including $17,000
previously written off as uncollectible
4.
Write-offs of accounts receivable considered to be
uncollectible
15,000
204,000
5,000
Instructions
a)
b)
c)
Prepare the journal entries to record each of these four groups of transactions.
Prepare the journal entry to record bad debts expense for 2006, assuming that the company
believes 10% of net sales for the year will be uncollectible.
Ignoring part b), prepare the journal entry to record bad debts expense for 2006, assuming
that the company believes 10% of year-end accounts receivable will be uncollectible.
Action Plan

Accounts receivable are generally recorded at invoice price.

Sales returns and allowances reduce the amount received on accounts receivable.

Write-offs of accounts and recovery of previously written-off accounts affect only balance
sheet accounts.

If you use the percentage-of-sales method to record bad debts, you do not have to take
into account the balance in the allowance for doubtful accounts.

If you use the percentage-of-receivables method to record bad debts, you must take into
account the balance in the allowance for doubtful accounts.
Solution to Demonstration Problem
a)
2006
Accounts Receivable
Sales
309,000
309,000
To record credit sales for the year
Sales Returns and Allowances
Accounts Receivable
15,000
15,000
To record sales returns and allowance
for the year
Accounts Receivable
Allowance for Doubtful Accounts
17,000
17,000
Cash
204,000
Accounts Receivable
204,000
To reverse the write-off of accounts
receivable and record collections for the year
Allowance for Doubtful Accounts
Accounts Receivable
24,000
24,000
To write off accounts receivable
that are considered uncollectible
b)
Bad Debt Expense
30,900
Allowance for Doubtful Accounts
30,900
To record the bad debt estimate for the year,
10% x $309,000
c)
Bad Debt Expense
10,700
Allowance for Doubtful Accounts
10,700
To record the bad debt estimate for the year,
10% x $117,000* – existing allowance of $1,000**
*
Year-end Accounts Receivable balance
**
Year-end Allowance for Doubtful Accounts
before adjustment
Opening
Returns
Collections
Reinstated
Written off
Opening
Re-instated
Write-offs
90,000 DR
(15,000)
(204,000)
17,000
(5,000)
117,000 DR
8,000 CR
17,000 CR
(24,000) DR
1,000 CR