91Ó°ÊÓ

(Bad-Debt Reporting) Presented below is information related to the Accounts Receivable accounts of Gulistan Inc. during the current year 2017.

1. An aging schedule of the accounts receivable as of December 31, 2017, is as follows.

Age	Net Debit Balance	% to be applied after correction is made
Under 60-days	\(172,342	1%
60-90 days	136,490	3%
91-120 days	39,924	6%
Over 120 days	23,644	\)3,700 definitely uncollectible; estimated remainder uncollectible is 25%
	\(372,400

*The \)3,240 write-off of receivables is related to the 91-to-120 day category.

2. The Accounts Receivable control account has a debit balance of \(372,400 on December 31, 2017.

3. Two entries were made in the Bad Debt Expense account during the year: (1) a debit on December 31 for the amount credited to Allowance for Doubtful Accounts, and (2) a credit for \)3,240 on November 3, 2017, and a debit to Allowance for Doubtful Accounts because of a bankruptcy.

4. Allowance for Doubtful Accounts is as follows for 2017.

Allowance for Doubtful Accounts
Nov 3	Uncollectible accounts written off	3,240	Jan 1	Beginning balance	8,750
			Dec 31	5% of \(372,400	18,620

5. A credit balance exists in Accounts Receivable (60–90 days) of \)4,840, which represents an advance on a sales contract.

Instructions

Assuming that the books have not been closed for 2017, make the necessary correcting entries.

Step by step solution

01

Definition of Aging Method

A method used to determine the amount of receivables that will be uncollectible is known as aging method. Under this method, different time buckets are prepared to sort receivables.

02

Correcting Journal Entries

Date	Accounts and Explanation	Debit $	Credit $
1	Bad debt expenses	$3,240
	Accounts receivables		$3,240
2	Accounts receivable	$4,840
	Advance sale contracts		$4,840
3	Allowance for doubtful accounts	$3,700
	Accounts receivables		$3,700
4	Allowance for bad debt expenses	$7,279.64
	Bad debt expenses		$7,279.64

Working Note:

Age	Net Debit Balance	% to be applied after correction is made	Amount $
Under 60-days	$172,342	1%	$1,723.42
60-90 days	$141,330 $\left(1,36,490+4,840\right)$	3%	$4,239.90
91-120 days	36,684 $\left(39,924-3,240\right)$	6%	$2,201.04
Over 120 days	19,944 $\left(23,644-3,700\right)$	$3,700 definitely uncollectible; estimated remainder uncollectible is 25%	$4,986
	$372,400		$13,150.36

Particular	Amount $
Reported balance $\left(18,620+8,750-3,700-3240\right)$	$20,430
Less: Correct balance	(13,150.36)
Adjustment	7,279.64

• If the business entity has not made the journal entry for $3,700 receivables written off earlier, then following changes will be reported in the problem:

Age	Net Debit Balance	% to be applied after correction is made	Amount $
Under 60-days	$172,342	1%	$1,723.42
60-90 days	$141,330 $\left(136,490+4840\right)$	3%	$4,239.90
91-120 days	36,684 $\left(39,924-3,240\right)$	6%	$2,201.04
Over 120 days	19,944 $\left(23,644-3,700\right)$	25%	$ 8,686 $\left[\left(19,944×25\%\right)+3700\right]$
	$372,400		$16,850.36

Particular	Amount $
Reported balance $\left(18,620+8,750-3,240\right)$	$24,130
Less: Correct balance	(16,850.36)
Adjustment	7,279.64

Note: A journal entry will be made to write off $3,700 after adjusting entries have been made.

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