Question

From inception of operations, Paramount Company provided for uncollectible accounts receivable under the
allowance method using the percentage of sales method.

The balance in the allowance for doubtful accounts was P500,000 on January 1, 2020.

During the current year, credit sales totaled P20,000,000, interim provisions for doubtful accounts were made at
2% of credit sales, P200,000 of bad debts were written o , and recoveries of accounts previously written o
amounted to P50,000.

The aging accounts receivable showed the following summary

Classification Balance Collectible

November to December 5,000,000 95%
July to October 2,000,000 90%
January to June 1,000,000 75%
Prior to January 1,2020 500,000 25%

Based on the review of collectibility of the account balances in "prior to January 1, 2020" aging category, additional
accounts totaling P100,000 are to be written o on December 31, 2020.

E ective with the year ended December 31, 2020, the entity adopted the aging method for estimating the allowance
for doubtful accounts

Requirements:

1. What is the required allowance for doubtful accounts on December 31, 2020?
2. What amount should be reported as doubtful accounts expense?
3. What is the year-end adjustment to the allowance for doubtful accounts on December 31, 2020?

 Expert Answer 

Step 1 Bad debts

Bad debts can be referred to as the amount of accounts receivable which are written o due to their inability to pay
the amount due. It is reported as an expense in the statement of profit or loss and reduces the balance of accounts
receivable.

Step 2 Part 1

1. The required allowance can be computed in the following manner:

Particulars Amount (P)

Opening balance 500,000

Add: Interim provision (20,000,000 X 2%) 400,000

Allowance for doubtful accounts 900,000

Less: Bad debts written o (200,000 + 100,000) (300,000)

Less: Estimated uncollectible (1,075,000)

Required allowance 475,000

Step 3 Part 2

2. Doubtful accounts expense:

Particulars Amount (P)

Bad debts written o 200,000

Add: Additional bad debts 100,000

Bad debts (A) 300,000

Estimated uncollectible:  

   November to December (5,000,000 X (1-0.95)) 250,000

   July to October (2,000,000 X (1-0.90)) 200,000

   January to June (1,000,000 X (1-0.75)) 250,000

   Prior to January 1,2020 (500,000 X (1-0.25)) 375,000

Estimated uncollectible accounts (B) 1,075,000

Doubtful accounts expense (A + B) 1,375,000

Step 4 Part 3

3. Year-end adjustment:

The bad debts expense will increase by P1,375,000 and the allowance for doubtful expense will increase by
P1,375,000.

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