Credit Losses Based on Credit Sales Lewis Company uses the allowance method for recording its expected credit losses. It estimates credit losses at 1% of credit sales which were $1,250,000 during the year. On December 31, the Accounts Receivable balance was $300,000 and the Allowance for Doubtful Accounts has a credit balance of $13,200 before adjustment. a. Prepare the adjusting entry to record the credit losses for the year. b. Show how Accounts Receivable and the Allowance for Doubtful Accounts would appear in the December 31 balance sheet

$300,700  

Explanation:

Net realizable value of the accounts receivable can be found by the following formula, which is:

Net Accounts receivables = Closing Accounts receivables before adjustment  -/+ Increase or decrease in Allowance for doubtful debts

So here,

Closing accounts receivables is $300,000

Allowance for the year = Closing Allowance calculated - Opening Allowance Value

Here

Closing Allowance is 1% of $1,250,000 which is $12,500.

And the previous year opening allowance is $13,200

This means

Allowance for the year = $12,500 - $13,200 = - $700

This means that their is a decrease in the allowance which must adjusted in the books of accounts as under:

Dr Allowance for Doubtful debts $700

Cr                   Accounts receivables     $700

Net Accounts receivables = Closing Accounts receivables + Increase or decrease in Allowance for doubtful debts

Net Accounts receivables = $300,000 + $700 = $300,700

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