Bad Debt Income Statement Approach Problem and Solution

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 % 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 % = 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

 
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