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

2. Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on its December 31, 2017, balance sheet given the facts in part 1a

3. Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on its December 31, 2017, balance sheet given the facts in part 1c.

Short answer

1. The adjusting entry passed to recognize bad debts is passed by debiting the bad debt expense and crediting the allowance for doubtful accounts.
2. The balance of $1,204,450is shown in accounts receivable in current assets after deducting the allowance for doubtful accounts.
3. The balance of $1,206,595is shown in accounts receivable in current assets after deducting the allowance for doubtful accounts.

Step-by-step solution

Meaning of Bad Debts

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

Adjusting journal entries

Date	Particulars	Debit($)	Credit($)
a	Bad debt expense	85,230
	Allowance for doubtful accounts		85,230
	(To record the bad debt expense)
b	Bad debt expense	75,870
	Allowance for doubtful accounts		75,870
	(To record the bad debt expense)
c	Bad debt expense	80,085
	Allowance for doubtful accounts		80,085
	(To record the bad debt expense)

Working notes:

1)

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

2)

$\begin{array}{rcl}Baddebtexpense& =& \left(Cashsales+Creditsales\right)\times Percentageofestimatedbaddebt\\ & =& \left(\$1,905,000+\$5,682,000\right)\times \frac{1}{100}\\ & =& \$75,870\end{array}$

3)

$\begin{array}{rcl}Baddebtexpense& =& \left(Accountsreceivables\times Percentageofestimateduncollectible\right)\\ & & +Allowancefordoubtfulaccounts\\ & =& \left(\$1,270,100\times \frac{5}{100}\right)+\$16,580\\ & =& \$80,085\end{array}$

Indication of the amounts in balance sheet

Balance Sheet
Assets	Amount($)
Current assets
Accounts receivables	1,270,100
Less: Allowance for doubtful accounts	68,650
	1,204,450

Representation of the amount

Balance Sheet
Assets	Amount($)
Current assets
Accounts receivables	1,270,100
Less: Allowance for doubtful accounts	63,505
	1,206,595

Working notes:

$\begin{array}{rcl}Allowancefordoubtfulaccounts& =& Accountsreceivables\times Percentageofestimateduncollectible\\ & =& \$1,270,100\times \frac{5}{100}\\ & =& \$63,505\end{array}$