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At year-end (December 31), Chan Company estimates its bad debts as 0.5% of its annual credit sales of $975,000. Chan records its Bad Debts Expense for that estimate. On the following February 1, Chan decides that the $580 account of P. Park is uncollectible and writes it off as a bad debt. On June 5, Park unexpectedly pays the amount previously written off. Prepare the journal entries of Chan to record these transactions and events of December 31, February 1, and June 5.

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Answer:

Journal Entries:

Dec 31            Bad Debts Expense                                           $4875

                            Allowances for doubtful accounts               $4875

Feb 1               Allowances for doubtful accounts                     $580

                            Accounts Receivable - P.Park                       $580

June 05          Accounts Receivable - P.Park                            $580

                             Allowances for doubtful accounts                $580

June 05           Cash                                                                     $580

                             Accounts Receivable - P.Park                        $580

Explanation:

On December 31 Chen estimates the potential receivable expected to be not paying to him. Therefore, he write off the receivable from balance sheet using the percentage of sales method of receivable of ($975000 x 0.5% = $4875). On Feb 1 Chen write off P.Park from receivable of $580 as he comes to know he will not pay but on June 5 P.Park pay him $580. First Chen reinstate the receivable afterwards he collect cash from receivable.

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