Question

At December 31, 2017, Ingleton Company reports the following results for the year:

Cash sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(1,025,000

Credit sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,342,000

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

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . \)575,000 debit

Allowance for doubtful accounts . . . . . . . . . . . . . 7,500 credit

Required

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

a. Bad debts are estimated to be 2.5% of credit sales.

b. Bad debts are estimated to be 1.5% of total sales.

c. An aging analysis estimates that 6% of year-end accounts receivable are uncollectible

Short answer

The answer of each subpart will be as follows:

1. $33,550
2. $35,505
3. $27,000

Step-by-step solution

Meaning of Bad Debt

Bad debt refers to an irrecoverable amount from the customer because he cannot repay it. It is treated as an expense of the business.

(a) Adjusting journal entry

Date	Particulars	Debit($)	Credit($)
a	Bad debt expense	33,550
	Allowance for doubtful accounts		33,550
	( To record the bad debt expense)
b	Bad debt expense	35,505
	Allowance for doubtful accounts		35,505
	(To record the bad debt expense)
c	Bad debt expense	27,000
	Allowance for doubtful accounts		27,000
	(To record the bad debt expense)

Working notes:

Calculation of estimated bad debt expense

Part a

$\begin{array}{rcl}Baddebtexpense& =& Creditsales\times Percentageofestimatedbaddebt\\ & =& \$1,342,000\times \frac{2.5}{100}\\ & =& \$33,550\end{array}$

Part b

$\begin{array}{rcl}Baddebtexpense& =& \left(Cashsales+Creditsales\right)\times Percentageofestimatedbaddebt\\ & =& \left(\$1,025,000+\$1,342,000\right)\times \frac{1.5}{100}\\ & =& \$35,505\end{array}$

Part c

$\begin{array}{rcl}Baddebtexpense& =& \left(Accountsreceivables\times Percentageofestimateduncollectible\right)\\ & & -Allowancefordoubtfulaccounts\\ & =& \left(\$575,000\times \frac{6}{100}\right)-\$7,500\\ & =& \$27,000\end{array}$