Question

(Recording Bad Debts) At the end of 2017, Aramis Company has accounts receivable of \(800,000 and an allowance for doubtful accounts of \)40,000. On January 16, 2018, Aramis Company determined that its receivable from Ramirez Company of $6,000 will not be collected, and management authorized its write-off.

Instructions

(a) Prepare the journal entry for Aramis Company to write off the Ramirez receivable.

(b) What is the net realizable value of Aramis Company’s accounts receivable before the write-off of the Ramirez receivable?

(c) What is the net realizable value of Aramis Company’s accounts receivable after the write-off of the Ramirez receivable?

Short answer

Net realizable value after write-off is equal to$760,000.

Step-by-step solution

Definition of Net Realizable Value

Net Realizable value refers to a business entity’s value from selling an asset after adjusting all selling expenses.

Journal entry to write off

Date	Accounts and Explanation	Debit $	Credit $
	Allowance for doubtful accounts	$6,000
	Accounts receivables		$6,000

Net realizable value before write off

Particular	Amount $
Accounts receivables	$800,000
Less: Allowance for doubtful accounts	(40,000)
Net realizable value	$740,000

Net realizable value after write off

Particular	Amount $
Accounts receivables$\left(\$8,000-\$6,000\right)$	$794,000
Less: Allowance for doubtful accounts$\left(\$40,000-\$6,000\right)$	(34,000)
Net realizable value	$760,000