Anzlyzing financial statement effects of accounting for bad debits using the allownace method.
Duffy Bros. uses the allowance method to account for bad debets expense. Duffy experienced the following four events in 2008:
1.Recognition of 64,000 of service revenue on account
2. Collection of 56,000 cash from accounts receievable
3. Determination that 900 of its accoutns were not collectible and wrote off these receivables.
4. Recogition of bad debits expense for the year. Duffy estimates that bad debits expense will be 2 percent of its sales
My Answers:
1. Debit Accounts receivable 64,000
Credit Service Revenue 64,000
2. Debit Cash 56,000
Credit Accounts receivable 56,000
3. Debit Allowance for Doubtful accounts 900
Credit Accoutns receivable 900
4. I don't know
Are those right? Please help me.
Your answers for events 1, 2, and 3 are correct. Let's move on to event 4.
To determine the bad debts expense for the year, Duffy Bros. estimates that it will be 2% of its sales. Based on this information, you can calculate the bad debts expense using the following steps:
Step 1: Calculate the total sales
In event 1, it is mentioned that $64,000 of service revenue was recognized on account. This means that the total sales for Duffy Bros. in 2008 was $64,000.
Step 2: Calculate the bad debts expense
Using the estimated percentage of 2% and the total sales calculated in step 1, you can calculate the bad debts expense as follows:
Bad Debts Expense = Total Sales * Estimated Percentage
Bad Debts Expense = $64,000 * 2% = $1,280
Step 3: Record the bad debts expense
To record the bad debts expense for the year, you need to make the following journal entry:
Debit Bad Debts Expense $1,280
Credit Allowance for Doubtful Accounts $1,280
The credit to the Allowance for Doubtful Accounts account represents an increase in the estimated amount set aside to cover potential bad debts.
So, your answer for event 4 should be:
Debit Bad Debts Expense $1,280
Credit Allowance for Doubtful Accounts $1,280
I hope this helps! Let me know if you have any further questions.
Your answers for events 1, 2, and 3 are correct. Now let's move on to event 4:
4. Recognition of bad debt expense for the year. Duffy estimates that bad debt expense will be 2 percent of its sales.
To recognize the bad debt expense, we need to calculate the amount based on the estimated percentage of sales.
First, we calculate the sales amount:
Sales amount = $64,000 (Service Revenue)
Next, we calculate the bad debt expense:
Bad debt expense = 2% of sales amount
Bad debt expense = 2% x $64,000
Bad debt expense = $1,280
The entry to recognize the bad debt expense would be:
Debit Bad Debt Expense $1,280
Credit Allowance for Doubtful Accounts $1,280
This entry represents the estimated amount of doubtful accounts that Duffy anticipates it will not be able to collect, which increases the allowance for doubtful accounts.