At each calendar year-end, Mazie Supply Co. uses the percent of accounts receivable method to estimate bad debts. On December 31, it has outstanding accounts receivable of $135,000, and it estimates that 5% will be uncollectible. Prepare the adjusting entry to record bad debts expense for the year ended December 31 under the assumption that the Allowance for Doubtful Accounts has: (a) a $2,295 credit balance before the adjustment. (b) a $675 debit balance before the adjustment.

Adjusting entries as at 31 December

A. 31 Dec

Dr bad debt expenses 4,455

Cr allowance for doubtful account 4,455

B. 31 Dec

Dr bad debt expenses 7,425

Cr allowance for doubtful account 7,425

Explanation:

a) Cr Unadjusted balance $ 2,295

Cr Estimated balance ($135,000 × 0.05)6,750

Cr Required adjustment$ 4,455

(b) Dr Unadjusted balance $675

Cr Estimated balance ($135,000 × 0.05)6,750

Cr Required adjustment$ 7,425

d. 1.08

Explanation:

The computation of the present value index is as follows

The Present value Index is

= Total Present Value of Net cash Inflows ÷ Investment  

= $455,200 ÷ $420,000  

= 1.08  

The total present value would be

Year     Net Cash Flow  Present Value factor  Present Value

1            $1,80,000                 0.909               $1,63,620

2           $1,20,000                 0.826                     $99,120

3           $1,00,000                0.751                      $75,100

4           $90,000                    0.683                    $61,470

5           $90,000                    0.621                     $55,890

Total Present Value of Net cash Inflows            $4,55,200