Exhibit 12.

Accounting for uncollectible accounts

Dee’s Department Store opened for business on January 2, Year 4. Sales on account
during Year 4 are $5 million. The firm estimates that uncollectible accounts will total 2%
of sales. Dee’s writes off $40,000 of accounts as uncollectible at the end of Year 4.
Collections on account during Year 4 totaled $3.5 million.

Required: Record journal entries for the following events.

a. Present the adjusting entry on December 31, Year 4, to apply the direct write-
off method for uncollectible accounts.
b. Present the adjusting entries on December 31, Year 4, to apply the allowance
method for uncollectible accounts.
c. Sales on account during Year 5 totaled $6 million. Dee’s writes off $110,000
of accounts as uncollectible on December 31, Year 5. Record the adjusting
entry on December 31, Year 5, to apply the direct write-off method for Year 5
d. Refer to part (c), record the adjusting entries on December 31, Year 5 to
apply the allowance method for Year 5.
e. Dee’s ages its accounts receivable on December 31, Year 5, and discovers
that it needs a balance in its Allowance for Uncollectible Accounts of $75,000
at the end of Year 5. Give the additional entries on December 31, Year 5,
beyond that in part (d) above to apply the allowance method for Year 5.

Solution
a. Bad Debt Expense $ 40,000
Accounts Receivable $ 40,000
To write off uncollectible amounts using the
direct write-off method for Year 4

b1 Bad Debt Expense 100,000

Allowance for Uncollectible Accounts 100,000
Estimated uncollectible amount using the
allowance method for Year 4 (2% of $5 million)
b2 Allowance for Uncollectible Accounts 40,000
Accounts Receivable 40,000
To write off uncollectible amounts using the
allowance method for Year 4

c. Bad Debt Expense 110,000

Accounts Receivable 110,000
To write off uncollectible amounts using the
direct write-off method for Year 5

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 d1 Bad Debt Expense 120,000
Allowance for Uncollectible Accounts 120,000
Estimated uncollectible amount using the
allowance method for Year 5 (2% of 6 million)
d2 Allowance for Uncollectible Accounts 110,000
Accounts Receivable 110,000
To write off uncollectible amounts using the
allowance method for Year 5

e. Bad Debt Expense 5,000

Allowance for Uncollectible Accounts 5,000
To adjust the Allowance for Uncollectible
Accounts to the desired ending balance of
$75,000, after the entries in part (b) and (d). *

*The T-account shows the following:

Allowance for Uncollectible Accounts

b2 40,000 b1 100,000
d2 110,000 d1 120,000
e 5,000
Bal 75,000

Questions

Question 19. Reconstruction events when using the allowance method

Selected data from the accounts of Seward Company after adjusting entries but before
closing entries appear below:
January 1 December 31
Accounts Receivable $82,900 Dr $87,300 Dr
Allowance for Uncollectible Accounts 8,700 Cr 9,100 Cr
Bad Debt Expense - 4,800 Dr
Sales - 240,000 Cr
The firm makes all sales on account. There were no recoveries during the year of
accounts written off in previous years.

Required: Set up T-accounts for each of the four accounts above and enter the balances
on January 1 and December 31. Enter in the T-accounts the entries that
Seward Company made during the year for the following:
a. Sales on account
b. Provision for estimated uncollectible accounts is 2% of the annual sales.
c. Write off actual uncollectible accounts (irrecoverable claim).
d. Collection of cash from customers from sales on account
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Question 20. Reconstruction events when using the allowance method
Selected data from the books of Logan Corporation before adjusting and closing entries:
January 1 December 31
Accounts Receivable $115,900 Dr $122,700 Dr
Allowance for Uncollectible Accounts 18,200 Cr 2,900 Cr
Sales - 510,000 Cr

Logan Corporation estimates that 5 percent of credit sales, will become uncollectible. The
cash sales were $60,000. The company collected from a client $5,000 during the year
which amount was written off in the previous year.

Required: Set up T-accounts for each of the three accounts above and enter the balances
on January 1 and December 31. Record on T-accounts the entries that Logan
Corporation made during the year for the following:
a. Cash sales
b. Sales on account
c. Provision for estimated uncollectible accounts
d. Write-off actual uncollectible accounts
e. Collection of cash from customers from sales on account
f. Collection of $5,000 cash from a client who’s account was treated earlier as
irrecoverable.

Question 21. Aging accounts receivable

Dove Company’s accounts receivable show the following balances by age:
Age of Accounts Balance Receivable
0 – 30 Days $400,000
31 – 60 Days 90,000
61 – 120 Days 40,000
More than 120 Days 20,000

The credit balance in the Allowance for Uncollectible Accounts is now $17,200.
Dove Company’s independent auditors suggest that the following percentages be used to
compute the estimates of amounts that will eventually prove uncollectible:
0 – 30 Days 0.5 percent
31 – 60 Days 1.0 percent
61 – 120 Days 10.0 percent
More than 120 Days 60.0 percent

Required: Set up T-accounts for Allowance for Uncollectible Accounts and

Bad Debts and record the entry that will carry out the auditors’ suggestion.

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Question 22. The revenue, the purchases and the cash in and out
The bank statement extract of Mr. Sleepy’s business for the year 2012 is as follows:
Cash collected from sales on account $167,000
Cash received from sales 49,400
Purchase of inventories and paid to suppliers 146,360
Purchase of fork-lifts and paid 41,000
The company is buying and selling tanning beds to beauty saloons.

Selected account balances in 2012::

January 1 December 31
Accounts Receivable $50,600 $47,120
Accounts Payable 26,160 33,080
Inventories 36,600 38,920

Required: a. Sales revenue in 2012

b. Merchandise purchases in 2012
c. Cost of goods sold in 2012
d. Gross margin in 2012

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