Question

At December 31, 2017, Hawke Company reports the following results for its calendar year.

Cash sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(1,905,000

Credit sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,682,000

In addition, its unadjusted trial balance includes the following items.

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . \)1,270,100 debit

Allowance for doubtful accounts . . . . . . . . . . . . . 16,580 debit

1. Prepare the adjusting entry for this company to recognize bad debts under each of the following independent assumptions.

a. Bad debts are estimated to be 1.5% of credit sales.

b. Bad debts are estimated to be 1% of total sales.

c. An aging analysis estimates that 5% of year-end accounts receivable are uncollectible

Short answer

Answer

The adjusting journal entry passed at the end of each year for recording the organization's bad debt expense will be as follows, considering the given percentage situations.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Bad Debts

Bad debts refer to that amount that is irrecoverable from the customers of an entity.

(a) Adjusting journal entry

Date	Particulars	Debit($)	Credit($)
a	Bad debt expense	85,230
	Allowance for doubtful accounts		85,230
	(To record the bad debt expense)

Working notes

$$\begin{gathered} Baddebtexpense=Creditsales\times Percentageofestimatedbaddebt \\ =\$5,682,000\times \frac{1.5}{100} \\ =\$85,230 \end{gathered}$$

(b) Adjusting journal entry

Date	Particulars	Debit($)	Credit($)
b	Bad debt expense	75,870
	Allowance for doubtful accounts		75,870
	(To record the bad debt expense)

Working notes

$$\begin{gathered} Baddebtexpense=(Cashsales+Creditsales)\times Percentageofestimatedbaddebt \\ =(\$1;905,000+\$5,682,000)\times \frac{1}{100} \\ =\$75,870 \end{gathered}$$

(c) Adjusting journal entry

Date	Particulars	Debit($)	Credit($0
c	Bad debt expense	80,085
	Allowance for doubtful accounts		80,085
	(To record the bad debt expense)

Working notes

$$\begin{gathered} Baddebtexpense=(Accountsreceivables\times Percentageofestimateduncollectible)+Allowancefordoubtfulaccounts \\ =\left(\$1,270,100\times \frac{5}{100}\right)+\$16,500 \\ =\$80,085 \end{gathered}$$