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(solution) Max Corporation is closing its accounting books and records for


Max Corporation is closing its accounting books and records for the year 2015. All sales at Max are

made on credit. The unadjusted trial balance of the company includes the following balances at 31

December 2015:

Dr. Cr.

Sales returns and allowances ........................................................... $22,500?dr?

Sales ................................................................................................ $ 510,000?cr?

Allowance for doubtful accounts ................................................... 2,625?cr)

Accounts receivable ........................................................................ 112,500Dr

During the year, Max Corp. estimates bad debt expense and the allowance for doubtful accounts using a

percentage of sales, and then, at year-end, after a careful and detailed analysis of the collectability of

accounts receivable, adjusts the balance of the allowance for doubtful accounts.

Required:

1. Prepare and present the entry for estimated bad debts and the allowance for doubtful accounts for the

year assuming that doubtful accounts are estimated to be 1% of net sales.

2. After the entry in 1 above relating to the estimate is made, Max performs a detailed analysis of the

aged accounts receivable and determines that an allowance for doubtful accounts of $6,000 is

required based on that analysis in order to finalize the allowance for doubtful accounts on the 31

December 2015 statement of financial position. Present the entry, if any is necessary, to make this

adjustment.

3. Assume that all the information above about Max's procedures and balances is the same, except that

the allowance for doubtful accounts has an unadjusted debit balance of $2,625 instead of a credit

balance of $2,625. Re-calculate the requirements presented in 1 and 2 above using this alternative

balance in the allowance for doubtful accounts.


Requirement (1)

 

Bad Debts Expense

 

Allowance for Doubtful Accounts 4,875

 

4,875 Sales

 

Sales returns and allowances

 

Net sales

 

Multiplied by: Estimated loss rate

 

Bad debts expense 510,000

 

(22,500)...

 


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