At december 31. 2015. hawke company reports the following results for its calendar year.

At December 31, 2015, Hawke Company reports the following results for its calendar year. Cash sales $ 1,905,000 Credit sales 5,682,000 In addition, its unadjusted trial balance includes the following items. 1) Prepare the adjusting entry for this company to recognize bad debts under each of the following independent assumptions a. Bad debts are estimated to be 1.5% of credit sales. b. Bad debts are estimated to be 1% of total sales. c. An aging analysis estimates that 5% of year-end accounts receivable are uncollectible. Accounts receivable $ 1,270,100 debit Allowance for doubtful accounts 16,580 debit 1A) Show how Accounts Receivable and the Allowance for Doubtful Accounts appear on its December 31, 2015, balance sheet given the facts in part 1a.

Answer

General guidance

Concepts and reason
Receivables: Accounts receivables or receivables are the right to receive money from the customers due to the providing of goods or services on account. Selling of goods or providing of services on cash does not create any right to be received in future as the consideration is received at the time of delivering goods (or providing of goods, as the case may be). The accounts receivables are reported under current asset in the balance sheet; and, the entities are also required to make estimation about the amount that they are expecting to receive from the customer as a part of good accounting practice. This is because, the customers may not pay the amounts as agreed upon. So in order to account for this unlikeliness, entities are required to report such amount that they are not expecting to collect from its customers

Fundamentals

Allowance for doubtful accounts: It is a contra asset account used to reduce the balance of the accounts receivable by an amount which is not expected to be received from the customers for the sales (or rendering of services) made on account. In other words, the allowance for doubtful debts records the amount of receivables which are not expected to be received by the entity. The allowance for doubtful accounts is presented as a deduction from the accounts receivables value so as to show expected amount that an entity is estimating to collect from the customers. Bad Debts Expense: The amount that is unlikely to be received from the customers for the sales made on account are reported under income statement as expense (i.e. bad debts expense). As per the matching principle concept, the expenses should be recorded in the same period in which the related revenue is earned. When estimation about the receivables which are not likely to be collected are made, then the corresponding income is also required to be reduced as the receivables are created only when the revenue is earned. Thus, to stay true to the matching principle concept, for the reduction in the asset (i.e. accounts receivable), the corresponding expense is recognized by debiting the bad debts expense. However, such expense would be allowed under financial reporting and not for income tax purposes.

Step-by-step

Step 1 of 4

1. a Prepare journal to recognize bad debts as provided below: Ref. No
Debit
(Dr.)
85,230
Credit
(Cr.)
Date
Accounts and Explanation
Bad Debts Expense
Allowance for doubtful accounts
($5,6

Part 1.a

Ref. No
Debit
(Dr.)
85,230
Credit
(Cr.)
Date
Accounts and Explanation
Bad Debts Expense
Allowance for doubtful accounts
($5,6


The bad debts expense account has been debited with a corresponding credit to the allowance for doubtful accounts with an amount equivalent to 1.5% of the total credit sales as provided in the question. The bad debts expense account has been debited to record reduction in the revenue by the amount which is not likely to be collected and the allowance for doubtful accounts has been credited to create the contra asset so as to reduce the accounts receivables to the amount which is expected to be collected.

Step 2 of 4

1. b Prepare journal to recognize bad debts as provided below: Credit
Ref. No Debit
(Cr.)
(Dr.)
75,870
Date Accounts and Explanation
Bad Debts Expense
Allowance for doubtful accounts
[($1.

Part 1.b

Credit
Ref. No Debit
(Cr.)
(Dr.)
75,870
Date Accounts and Explanation
Bad Debts Expense
Allowance for doubtful accounts
[($1.


The bad debts expense account has been debited with a corresponding credit to the allowance for doubtful accounts with an amount equivalent to 1% of the total sales as provided in the question. The bad debts expense account has been debited to record reduction in the revenue by the amount which is not likely to be collected and the allowance for doubtful accounts has been credited to create the contra asset so as to reduce the accounts receivables to the amount which is expected to be collected.

Step 3 of 4

1. c Prepare journal to recognize bad debts as provided below: Date
Accounts and Explanation
Ref. No.
Debit
(Dr.)
80,085
Credit
(Cr.)
Bad Debts Expense
Allowance for doubtful accounts
($1.

Part 1.c

Date
Accounts and Explanation
Ref. No.
Debit
(Dr.)
80,085
Credit
(Cr.)
Bad Debts Expense
Allowance for doubtful accounts
($1.


The bad debts expense account has been debited with a corresponding credit to the allowance for doubtful accounts with an amount equivalent to 5% of the year end accounts receivable as provided in the question. The bad debts expense account has been debited to record reduction in the revenue by the amount which is not likely to be collected and the allowance for doubtful accounts has been credited to create the contra asset so as to reduce the accounts receivables to the amount which is expected to be collected.

Step 4 of 4

1. A. Prepare an extract of balance sheet to show the accounts receivable as on December 31, 2015 as provided below: Current Assets:
Accounts receivable
Less: Allowance for doubtful accounts
(W.N. 1)
$1,270,100
$68,650
$1,201,450 Workings: 1. Particulars
Balance in allowance for doubtful accounts
Allowance for the curent year
Net balance
Amount
$16,580 (Debit)
$85,2

Part 1.A

Net balance of accounts receivable in balance sheet is $1,201,450


Allowance for doubtful accounts is a contra asset account which is used to reduce the balances of accounts receivable so as to report only that amount which is expected to be received. The allowance for doubtful accounts is credited to create a contra asset against the receivables by the amount which according to the entity is not expected to be collected from its customers in the future.

In the given question, the accounts receivables balance has been reduced by the allowance for doubtful accounts; where the amount of allowance for doubtful account is the net of opening balance (debit) and the balance created for the current year.

Answer

Part 1.a

Ref. No
Debit
(Dr.)
85,230
Credit
(Cr.)
Date
Accounts and Explanation
Bad Debts Expense
Allowance for doubtful accounts
($5,6

Part 1.b

Credit
Ref. No Debit
(Cr.)
(Dr.)
75,870
Date Accounts and Explanation
Bad Debts Expense
Allowance for doubtful accounts
[($1.

Part 1.c

Date
Accounts and Explanation
Ref. No.
Debit
(Dr.)
80,085
Credit
(Cr.)
Bad Debts Expense
Allowance for doubtful accounts
($1.

Part 1.A

Net balance of accounts receivable in balance sheet is $1,201,450

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