Allowance Method for Accounting for Bad Debts
At the beginning of 2008, EZ Tech Company’s accounts receivable balance was $140,000 and the
balance in Allowance for Doubtful Accounts was $2,350 (cr.). EZ Tech’s sales in 2008 were
$1,050,000, 80% of which were on credit. Collections on account during the year were $670,000.
The company wrote off $4,000 of uncollectible accounts during the year.
1. Prepare summary journal entries related to the sale, collections, and write-offs of accounts
receivable during 2008.
2. Prepare journal entries to recognize bad debts assuming (a) bad debt expense is 3% of credit
sales and (b) amounts expected to be uncollectible are 6% of the year-end accounts receivable.
3. What is the net realizable value of accounts receivable on December 31, 2008, under each
assumption in (2)?
4. What effect does the recognition of bad debt expense have on the net realizable value? What
effect does the write-off of accounts have on the net realizable value?