At the end of the year, the M. I. Wright Company showed the following selected account balances:

Sales (all on credit).......................................................................... $300,000

Accounts Receivable.......................................................................   800,000

Allowance for Doubtful Accounts....................................................     38,000

Required:

1.   Assume the company estimates that 1% of all credit sales will not be collected.
      a.   Prepare the proper journal entry to recognize the expense involved.
      b.   Present the balances in Accounts Receivable and Allowance for          Doubtful Accounts as they would appear on the balance sheet. Also show the net realizable Accounts Receivable.

2.   Assume the company estimates that 5% of its accounts receivable  will never be collected.
      a.   Prepare the proper journal entry to recognize the expense involved.
      b.   Present the balances in Accounts Receivable and Allowance for          Doubtful Accounts as they would appear on the balance sheet. Also show the net realizable Accounts Receivable.

3. Under assumptions 1 and 2 above, give the proper journal entries for the following events.

    June 3             John Shifty, who owes us $500, informs us that  he is broke and cannot pay. We believe him.

    Nov. 9              We learned that John Shifty has won the lottery and is willing to pay off all his old debts.

1a.     Bad Debts Expense.........................................             3,000
              Allowance for Doubtful Accounts..............                   3,000
              ($ 300,000 X 1 %)

1b.     Accounts Receivable....................................... $800,000
          Less: Allowance for Doubtful Accounts.........     41,000
          Estimated Realizable A/R................................ $759,000

2a.     Bad Debts Expense.........................................             2,000
              Allowance for Doubtful Accounts..............                   2,000
              ($ 800,000 X 5 % less $38,000)

2b.     Accounts Receivable....................................... $800,000
          Less: Allowance for Doubtful Accounts.........     40,000
           Estimated Realizable A/R.............................. $760,000

3.            Both assumptions 1 and 2 above represent the allowance method of accounting for uncollectibles. The only difference is in the approach to estimating uncollectibles. Therefore the entries to write off and show subsequent reinstatement would be the same in 1 and 2.


June 3         Allowance for Doubtful Accounts         500
                        Accounts Receivable, John Shifty........              500


Nov. 9         Accounts Receivable, John Shifty         500
                        Allowance for Doubtful Accounts........              500


Note: There would be a closing entry for the Bad Debts Expense since it is an expense account just like any other expense account. There would be no closing entry for the Allowance for Doubtful Accounts since it is not a temporary account. It is a contra-asset account, contra to Accounts Receivable.