During Burns Company's first year of operations, credit sales totaled $140,000 and collections on credit sales totaled $105,000. Burns estimates that bad debt losses will be 1.5% of credit sales. By year-end, Burns had written off $300 of specific accounts as uncollectible.

Prepare all appropriate journal entries relative to uncollectible accounts and bad debt expense.

The required journals relating to uncollectible accounts and bad debt expense are:

Uncollectible accounts:

Debit Allowance for doubtful accounts                     $300

Credit Accounts receivable                                        $300

(To record the write-off)

Bad debt expense:

Debit Bad debt expense (1.5% x $140,000)           $2,100

Credit Allowance for doubtful accounts                 $2,100

(To record bad debt expense)

Explanation:

Burns Company adopts the percentage of credit sales method in estimating accounts receivable that is uncollectible.

The write-off was passed against the allowance for doubtful accounts while 1.5% of the credit sales was used to establish the amount of required bad debt expense.

Based on the journals above therefore, the net realizable value of accounts receivable at the end of the period becomes:

Accounts receivable ($140,000 - $105,000)                   $35,000

Allowance for doubtful accounts ($2,100 - $300)            ($1,800)

Accounts receivable, net realizable value                    $33,200

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