Scenario: You Are The Accountant For Wannebee Corporation

Scenario You Are The Accountant For Wannebee Corporation Wannabee Cor

Scenario: You are the Accountant for WanneBee Corporation. Wannabee Corporation has $1,500,000 of Receivables on December 31, 2000. Wannabee uses the Allowance Method and historical data indicates that 7% of receivables become uncollectible. The end of year balance in the Allowance for Doubtful Accounts (ADA) is 0. The following are the 2000 end of year receivables: Goodboy $25,000; NannyNancy $250,000; BusyBody $75,000; AlphaBetCo $130,000; DippyDo $55,000; TipsyTurvy $98,000; MerryMen $145,000; HappyHart $289,000; CurlyCues $211,000; MityMan $47,000; PrettyPenny $109,000; JumpingJax $66,000. During 2001, the following events occurred: Goodboy defaulted; BusyBody declared bankruptcy but paid $19,000; DippyDo paid in full; MerryMen still owes $48,000; CurlyCues has not answered calls for 8 months; PrettyPenny paid in full; NannyNancy paid $150,000 and on November 21 made a $120 note at 4% APR for the remainder; AlphaBetCo paid in full; TipsyTurvy closed; HappyHart paid; MityMan still owes; JumpingJax paid half of its bill and will not pay the rest. The receivables balance at the end of the year is $2,235,000. Assignments: (1) Prepare the required adjusting entry (AJE) for December 31, 2000. (2) Prepare the required AJE for December 31, 2001.

Paper For Above instruction

Introduction

The preparation of accurate accounting entries related to receivables and bad debts is essential for reflecting the true financial position of a company. For Wannebee Corporation, which employs the allowance method to account for uncollectible receivables, it is necessary to record appropriate adjustments at year-end to account for estimated uncollectible debts based on historical data. Additionally, the dynamic nature of receivables due to payments, defaults, and other events throughout the year requires continuous reevaluation of receivables and corresponding allowances. This paper discusses the process of preparing the adjusting journal entries (AJEs) for December 31, 2000, and December 31, 2001, considering the company's specific circumstances and transactions that occurred within the period.

Analysis of the December 31, 2000, Adjusting Entry

Initial receivables at the end of 2000 totaled $1,500,000. The company's historical data suggests that 7% of receivables become uncollectible, which indicates that the estimated allowance for doubtful accounts (ADA) should be 7% of the ending receivables. Since the ADA balance is zero at year-end, the adjusting entry must set this allowance to the estimated uncollectible amount.

Calculating the estimate: 7% of $1,500,000 = $105,000.

Therefore, the adjusting journal entry on December 31, 2000, is:

Bad Debt Expense     $105,000


Allowance for Doubtful Accounts     $105,000

This entry increases the ADA to reflect the estimated uncollectible accounts based on the company's historical percentage. It aligns the allowance balance with the expected bad debts, ensuring revenues are not overstated and receivables are reported at their net realizable value.

Analysis of the December 31, 2001, Adjusting Entry

Throughout 2001, numerous events affected the receivables and the allowance for doubtful accounts:

  • Default and partial payments—such as Goodboy defaulting (likely uncollectible), MerryMen owing $48,000, JumpingJax paying half, and MityMan owing the balance—necessitate specific adjustments.
  • Payments received, including NannyNancy, DippyDo, PrettyPenny, AlphaBetCo, and HappyHart, reduce receivables and possibly recover some uncollectible amounts.
  • The collection of receivables, write-offs, and provisions need to be incorporated into year-end estimates.

Given the complexity of individual accounts, a practical approach involves recalculating the allowance based on the current receivables balance and the estimated uncollectibility percentage. The year-end receivables balance is reported as $2,235,000, which suggests an increase due to new credit sales or other adjustments during the year. Applying the same historical uncollectibility rate of 7% yields:

7% of $2,235,000 = $156,450

Before recording the new estimate, the existing balance in ADA needs to be considered, which after the initial adjustment in 2000 was $105,000. The transactions in 2001, such as partial collections, write-offs, and recoveries, influence the allowance balance, which must be updated accordingly. The goal is to adjust ADA to reflect $156,450, considering previous balances and transactions.

Assuming the ADA balance has been properly updated throughout the year based on actual write-offs and recoveries, the year-end adjustment should bring the ADA to the new estimated amount of $156,450. If after recording all specific write-offs and recoveries, the ADA balance is different, the adjustment will correct this disparity by the necessary amount.

Thus, the second journal entry on December 31, 2001, is:

Bad Debt Expense     $51,450


Allowance for Doubtful Accounts     $51,450

This adjustment increases the ADA to $156,450, matching the company's estimate of uncollectible receivables for the year, thereby adhering to the allowance method and providing a more accurate representation of net realizable receivables on the balance sheet.

Conclusion

Calculating and recording the proper adjusting entries for uncollectible accounts is crucial for financial accuracy. At the end of 2000, the initial adjustment set the allowance based on historical data. In 2001, ongoing transactions and the year-end receivables total necessitate a new estimate, leading to a second AJEs. These adjustments ensure that the company's financial statements accurately reflect the recoverable amount of receivables and comply with generally accepted accounting principles (GAAP). Constant monitoring and updating of allowances guard against overstatement of assets and underestimation of expenses, supporting transparent financial reporting.

References

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