Question

Happy Lawn Company started a lawn services business on January 1, 20X1 (so all account balances were zero on January 1, 20X1). It sends invoices to its customers for lawn maintenance services at the end of each month, and expects the customer to pay within 30 days. All of these sales were made on credit. During 20X1, cash collected from its customers totaled $750,000 for services rendered during the year. At the end of 20X1, the Accounts Receivable for Happy Lawn had a balance of $60,000. After all write-offs but before the year-end adjusting entry, the Allowance for Doubtful Accounts had a debit balance of $4,000. Given the above information and considering the recording of Bad Debt Expense for the year, regardless of the method used to estimate bad debts, the ending Allowance for Doubtful Accounts balance for 20X1 will be: Multiple Choice

Answer 1

Question Completion:

Assume that Happy Lawn uses the percentage of credit sales method to directly calculate the bad debt expense) instead of the aging method, and it is estimated that it will not collect 1% of the total credit sales.

Answer:

Happy Lawn Company

Given the above information and considering the recording of Bad Debt Expense for the year, regardless of the method used to estimate bad debts, the ending Allowance for Doubtful Accounts balance for 20X1 will be:

= $8,140.

Explanation:

a) Data and Calculations:

Total credit sales:

Cash collected from customers = $750,000

Accounts receivable balance            60,000

Write-off of debts                                 4,000

Total credit sales for the year       $814,000

Allowance for Doubtful Accounts       8,140 ($814,000 * 1%)

Bad Debts Expense = $12,140 ($8,140 + $4,000)

b) Since Happy Lawn is a new outfit, it does not have beginning balances of Accounts Receivable and Allowance for Doubtful Accounts.  With a debit balance of $4,000 in the Allowance for Doubtful Accounts, signifying a write-off (contrary entry from the Accounts Receivable), the balance in the Allowance for Doubtful Accounts at year-end is expected to be equal to 1% of the credit sales.  This will require a credit entry for Bad Debts Expense.