Bad Debt Analysis – Allowance Account On January 1, 2009 the balance in Tabor Co.’s Allowance for Bad Debts account was $13,400. During the first 11 months of the year, bad debts expense of $21,462 was recognized. The balance in the Allowance for Bad Debts account at November 20, 2009 was $9,763. Required: a. What was the total of accounts written off during the first 11 months? (Hint: Make a T-account for the Allowance for Bad Debts account.) b. As the result of a comprehensive analysis, it is determined that the Dec. 31, 2009 balance of the Allowance for Bad Debts account should be $9,500. Show the adjustment required in the horizontal model or in journal entry form. c. During a conversation with the credit manager, one of Tabor’s sales representatives learns that a $1,230 receivable from a bankrupt customer has not been written off but was considered in the determination of the of the appropriate year-end balance of the Allowance for Bad Debts account balance. Write a brief explanation to the sale representative explaining the effect that the write-off of this account receivable would have on 2009 net income.
Allowance for Bad Debts
Bad debt write-offs 1/1/02 balance $13,400 (from 1/1 to 11/30) ? Bad debt expense
(from 1/1 to 11/30) 21,462 1/30/02 balance $ 9,763
Adjustment required (11/30/02) ?
12/31/02 balance $ 9,500
a. Solution approach: The bad debt write-offs from January through November can be determined by subtracting the November 30 balance from the total of the beginning
balance and the bad debts expense recognized for the first 11 months.
Bad debt write-offs = $13,400 + $21,462 - $9,763 = $25,099
b. The adjustment required at December 31, 2002 can be determined by comparing the
November 30 balance in the allowance account to the desired ending balance.
Bad debt expense adjustment = $9,763 - $9,500 = $263
Dr. Allowance for Bad Debts $263
Cr. Bad Debts Expense $263
To adjust the allowance account to the appropriate balance, and to correct the
overstatement of expense recorded in the January through November period.
Balance Sheet Income Statement Assets = Liabilities + Owners’ Equity ß Net income = Revenues - Expenses
Allowance (Note: A reduction in an expense increases net Bad Debts
for Bad Debts income, and a reduction in a contra-asset account Expense
+263 increases total assets.) +263
c. The write-off will not have any effect on 2002 net income, because the write-off decreases both the accounts receivable asset and the allowance account contra-asset for equal amounts. Net income was affected when the expense was recognized.