The following information relates to Tyrell Ltd for year 2022. Tyrell’s financial year end on 31 December: Total credit sales $800 000 Accounts receivable at 31 December 2022 60 000 Bad debts written off during 2022 4 500 Required (a) Prepare journal entries to record the bad debts expense at 31 December 2022 if Tyrell Ltd uses the direct write-off method of accounting for bad debts? (b) Assume that Tyrell Ltd decides to estimate its bad debts expense based on 8% of accounts receivable. Prepare journal entries to record the bad debts expense if allowance for doubtful debts account has a beginning (or unadjusted) credit balance of $4 000. (c) Assume the same facts as in part (b), except that there is a beginning (or unadjusted) debit balance of $1 200 in allowance for doubtful debts. Prepare journal entries to record the bad debts expense at 31 December 2022.
Question
The following information relates to Tyrell Ltd for year 2022. Tyrell’s financial year end on 31 December: Total credit sales 4 000. (c) Assume the same facts as in part (b), except that there is a beginning (or unadjusted) debit balance of $1 200 in allowance for doubtful debts. Prepare journal entries to record the bad debts expense at 31 December 2022.
Solution
(a) If Tyrell Ltd uses the direct write-off method of accounting for bad debts, the journal entry to record the bad debts expense at 31 December 2022 would be:
Debit: Bad Debts Expense 4,500
This entry recognizes the bad debts expense and reduces the accounts receivable by the amount of the bad debts.
(b) If Tyrell Ltd decides to estimate its bad debts expense based on 8% of accounts receivable, the calculation would be:
4,800 (Estimated Bad Debts Expense)
The journal entries to record the bad debts expense would be:
Debit: Bad Debts Expense 4,800
This entry recognizes the estimated bad debts expense and increases the allowance for doubtful debts by the same amount.
(c) If there is a beginning (or unadjusted) debit balance of $1,200 in allowance for doubtful debts, the calculation for the bad debts expense would be the same as in part (b):
4,800 (Estimated Bad Debts Expense)
However, because there is a debit balance in the allowance for doubtful debts, we need to add this to the estimated bad debts expense to get the total bad debts expense:
1,200 (Unadjusted Debit Balance) = $6,000 (Total Bad Debts Expense)
The journal entries to record the bad debts expense would be:
Debit: Bad Debts Expense 6,000
This entry recognizes the total bad debts expense and increases the allowance for doubtful debts by the same amount.
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