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

 
Contents
Financial Ratios Accounting Cycle Accounting Principles Financial Accounting Basics Financial Statements Reporting Bad Debts Bad Debts Direct Write-off Method Bad Debts Allowance Method Recovery of Bad Debts Bad Debt as Percentage of Sales Bad Debt Based on Receivable Bad Debt Income Statement Approach Problem and Solution How to calculate bad debt expense with accounts receivable Bad Debts MCQS - Multiple Choice Questions - Online Quiz Current Assets Long-term Assets Voucher System Partnership Depreciation Work Sheet - 10 Column Work Sheet Difference Between Reserve and Fund Accounting for Leases Capital reduction and reconstruction Absorption of Company Amalgamation Accounting for Installment Sales Basis of Recording Profit and Loss Branch Accounting Construction Contracts Revenue Recognition Accounting for Groups Financial Analysis Events After the Balance Sheet Date Deferred Tax Cost Accounting Activity Based Costing (ABC) Throughput Accounting Relevant Cost Break Even Analysis Standard Costing Inventory Management Payroll Accounting Royalty Accounting Statistics Master Budget Salary Income Microsoft Excel Tutorial Other Topics Share or Stock Valuation Model Financial Management Topics Kinds of Endorsement Letter of Credit, Kinds and Its Advantages/ Utilities Modern Functions of a Commercial Banks Difference Between Secured And Unsecured Loan Excel conditional formatting red if negative green if positive How to Remove Extra Spaces in Excel Result Card or Result Sheet Creation Using Excel Basic Accounting MCQS Multiple Choice Questions