Question

At year-end (December 31), Chan Company estimates its bad debts as 0.40% of its annual credit sales of $882,000. Chan records its Bad Debts Expense for that estimate. On the following February 1, Chan decides that the $441 account of P. Park is uncollectible and writes it off as a bad debt. On June 5, Park unexpectedly pays the amount previously written off.
Prepare the journal entries for these transactions.

1. Record the estimated bad debts expense.
2. Record the entry to write off P. Park's account as uncollectible.
3. Record the reinstatement of Park's previously written off account.
4. Record the cash received on account.

Answer 1

Answer:

1. Debit Bad debt expense   $3528

  Credit  Allowance for doubtful debt   $3528

  Being entries to record bad debt estimates.

2. Debit Allowance for doubtful debt   $441

   Credit  Accounts receivable   $441

  Being entries to record receivables gone bad.

3. Debit Accounts receivable   $441

  Credit  Allowance for doubtful debt   $441

  Being entries to reinstate receivables written off.

4. Debit Cash account   $441

  Credit  Bad debt expense $441

Being entries to record amount received on accounts

Explanation:

When a company makes sales on account, debit accounts receivable and credit sales. Based on assessment, some or all of the receivables may be uncollectible.  

To account for this, debit bad debit expense and credit allowance for doubtful debt. Should the debt become uncollectible (i.e go bad), debit allowance for doubtful debt and credit accounts receivable.

Where a debit that had previously been determined to have gone bad gets settled, debit cash and credit bad debt expense.

Amount of bad debt estimates

= 0.4% * $882,000

= $3528