When the bad debts are estimated over the amount of sales, then this method is called bad debt income statement approach. In this post, we will share problems and solutions so that you can practice more for your upcoming exams.
Problem
Aluma is an online store that sells vegetable gardening supplies to users all over North America. Following are the balances obtained from its accounting records:
| Accounts receivable – opening balance | 170,000 |
| Allowance for bad debts (debit balance) – opening balance | 1,600 |
| Sales revenue | 750,000 |
| Cash collected from customers | 300,000 |
You are required:
To record adjusting entry in case allowance for doubtful debt is estimated @ 6 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} of sales revenue.
Prepare a partial balance sheet from available information.
Solution
Computation of bad debts expense
Bad debt expense = net credit sales x rate of bad debt on sales = 750,000 x 6 {1bb28fb76c3d282be6cfd0391ccf1d9529baae691cd895e2d45215811b51644c} = 45,000
Allowance for doubtful debt – adjusting entry
| Particulars | Debit | Credit |
| Bad debts expense | 45,000 | |
| Allowance for bad debts | 45,000 |
Accounts Receivable
| Opening balance | 170,000 | Cash | 300,000 |
| Sales | 750,000 | Closing Balance | 620,000 |
| 920,000 | 920,000 |
Allowance for bad debts
| Opening balance | 1,600 | Bad debts expense | 45,000 |
| Closing balance | 43,400 | ||
| 45,000 | 45,000 |
Aluma
Partial balance sheet
As on December 31, XXX
| ASSETS | EQUITIY & LIABILITIES | |
| Accounts Receivable | 620,000 | |
| Allowance for doubtful debt | (43,400) | |
| Net accounts receivable | 576,600 |