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The remaining questions relate to the following presentation in the balance sheets of HiROE Co. at December 31, 2014 and 2013: a. Describe how the allowance amount at December 31, 2014 was most likely determined. b. If the bad debt expense for 2014 totaled $14,000, what was the amount of accounts receivable written off during the year? c. The December 31, 2014 allowance account balance includes $3,500 for a past due account that is not likely to be collected. This account has not been written off. If it had been written off, what would have been the effect of the write off on working capital?
Expert Answer
a) Allowance for uncollectible accounts is mostly determined using % of sales method or % of Ending Balance of Accounts Receivable ( gross). Under % of sales method, an estimated % of Bad debt allowance is applied directly to Sales for the period whereas in latter % of Estimated Bad debt is applied to ending balance of Account Receivable before charging any allowance ( i.e. on gross amount outstanding ).
b)
Amount of 6000 will be written off from Accounts Receivable.
Complete working of Bad debt can be explained using following t accounts
| Accounts Receivable ( Extract) | |||||
| Beginning Balance | 410000.00 | Bad debt | 6000 | ||
| Ending Balance | 499000 | ||||
| Allowance for uncollectible accounts | |||||
| Beginning Balance | 4000 | ||||
| Accounts Receivable | 6000 | Income Summary | |||
| ( Expensed to Income statement) | 14000 | ||||
| Ending Balance | 12000 | ||||
Amount of 6000 will be written off from accounts Receivable account as bad debt .
c) There will be no Change in Working Capital as Journal for writting of this amount will be
Allowance for uncollectible Accounts 3500 debit
Accounts Receivable 3500 Credit
This will reduce both Current assets and current Liabilties leaving no effect on Working Capital
c)
