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The following information pertains to Mountain High Campers. A. Mountain High Campers estimates bad debt expense at 3/5% of credit sales. The company reported accounts receivable and allowance for uncollectible accounts balances of 486,000 and 220 (cr) respectively, at Dec. 31, 2012. During 2013, Mountain High’s credit sales and collections were 415,000 and 519,000 respectively, and 3,200 in bad accounts were written off. 1. Prepare the adjusting entry to record bad debt expense for 2013 (show supporting calculations or use T accounts to support your answer). 2. Mountain High's accounts receivable at December 31, 2013, are _________________. 3. Mountain High's adjusted allowance for uncollectible accounts at December 31, 2013, is_________. 4. How would the amount in A1 differ if the allowance account had an ending balance on December 31, 2012, of 120 (dr). B. Mountain High estimates bad debts on an analysis of receivables. An aging schedule estimates bad debts to be 3000. Using the relevant data from Part A, answer the same 4 questions. C. Prepare a summary journal entry (all bad accounts written off in a single entry) if Mountain High had used the direct write-off method of accounting for uncollectible accounts.

Paper For Above instruction

In managing credit and uncollectible accounts, companies often utilize various estimation methods to determine appropriate expenses and allowances. This paper explores the calculation processes related to Mountain High Campers’ bad debt expenses, allowance for uncollectible accounts, and accounts receivable balances, based on different estimation techniques. The focus is on understanding adjusting journal entries, receivable balances, and the impact of different allowance balances at year-end, along with the implications of using the direct write-off method.

Introduction

Effective management of accounts receivable and uncollectible accounts is vital for a company's financial health. Understanding how to estimate bad debts accurately affects financial statements and decision-making. Mountain High Campers’ financial data from 2012 and 2013 provides a real-world context for applying estimation techniques such as percentage of credit sales and aging analysis.

Part A: Estimations Based on Percentage of Credit Sales

Calculating Bad Debt Expense

Mountian High estimates its bad debt expense as 3/5% of credit sales. With credit sales of 415,000 in 2013, the bad debt expense is calculated as follows:

  • Bad debt expense = Credit sales × Bad debt percentage
  • Bad debt expense = 415,000 × 0.006 or 0.6%
  • Bad debt expense = 2,490

Therefore, the adjusting journal entry to record the bad debt expense would be:

Debit: Bad Debt Expense  $2,490


Credit: Allowance for Uncollectible Accounts  $2,490

Calculating Accounts Receivable at December 31, 2013

Accounts receivable at year-end can be calculated by adjusting the opening balance with sales and collections, then subtracting write-offs:

  • Opening accounts receivable = 486,000
  • Plus: Credit sales = 415,000
  • Less: Collections = 519,000
  • Less: Write-offs = 3,200

The ending accounts receivable is calculated as:

Ending accounts receivable = Opening receivables + Credit sales - Collections - Write-offs


= 486,000 + 415,000 - 519,000 - 3,200


= 378,800

Calculating Allowance for Uncollectible Accounts at December 31, 2013

The allowance balance needs to be adjusted for the current period’s bad debts and existing balance.

Starting allowance (Dec 31, 2012): 220 (cr)

Less: Write-offs during 2013: 3,200

Unadjusted allowance after write-offs: 220 - 3,200 = -2,980 (debit balance)

Adjust for the current bad debt expense of 2,490; the new allowance balance becomes:

Allowance before adjustment = -2,980


Add: Bad debt expense adjustment = 2,490


Adjusted allowance = -2,980 + 2,490 = -490

Effect of Different Ending Allowance Balance in 2012

If the ending allowance balance on December 31, 2012, was 120 (debit), the calculations would change accordingly. The net effect would be an adjustment to this opening balance when calculating the ending allowance for 2013. The process involves adding or subtracting the bad debts and write-offs to this starting point.

Part B: Aging Schedule Estimation

Using an aging analysis, bad debts are estimated at 3,000, providing an alternative approach compared to percentage of sales. Similar calculations for receivables and allowances are performed following this method, adjusting the allowance to match the aging estimate.

Part C: Direct Write-Off Method

Under the direct write-off method, bad debts are recognized when accounts are deemed uncollectible, directly impacting accounts receivable without an allowance. The journal entry would involve debiting Bad Debt Expense and crediting Accounts Receivable for the specific uncollectible accounts.

Conclusion

Estimating uncollectible accounts and analyzing receivables involve pivotal accounting decisions. The percentage of sales method provides a straightforward approach, while aging analysis offers a more detailed estimate. The choice of method significantly influences financial reporting and our understanding of a company's financial health.

References

  • Gordon, R. (2020). Accounting Principles (13th ed.). McGraw-Hill Education.
  • Hall, R. (2019). Financial Accounting: An Introduction to Concepts, Methods, and Uses (12th ed.). Cengage Learning.
  • Hermanson, D. R., & Hermanson, C. T. (2021). Financial Accounting. Wiley.
  • Lehman, C. (2018). Financial Statement Analysis & Valuation. McGraw-Hill Education.
  • Gibson, C. H. (2020). Financial Reporting and Analysis (13th ed.). Cengage Learning.
  • Thompson, A., Strickland, A. J., & Gamble, J. E. (2019). Crafting & Executing Strategy: The Quest for Competitive Advantage. McGraw-Hill Education.
  • Chen, S. (2017). Modern Financial Accounting. Pearson.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Financial Accounting (11th ed.). Wiley.
  • Rappaport, A. (2021). Creating Shareholder Value: A Guide for Managers and Investors. Free Press.
  • Warren, R. N., Reeve, J. M., & Fess, P. E. (2018). Financial & Managerial Accounting. Cengage Learning.

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