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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
Satisfied Customers: 4545
Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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Would be interested to know what the journal entry would be

This answer was rated:

Would be interested to know what the journal entry would be for this situation:

Wife has invested $80k in her retail store (incorporated) and therefore is owed $80k by the store (s/h loan).
Store is struggling so husbands corp decides to take active interest in rescuing the retail operation of wife's store.
Wife assigns the $80k note to her over to the husbands corp and it is recorded in the husbands corp as a note receivable and a s/h loan from the wife.
Over a period of two years some of the note receivable is paid from the store to the husbands corp.
At the end of the two years the store has not successfully turned around and ceases operations.
When the smoke clears and all money is gone the husband's corp still has a note receivable of $40k.

Presumably this cannot go down as bad debt expense as it is not owed by customers for goods sold.

How is this bad debt recorded in the journal of the husbands corp?

Rakhi Vasavada :

Dear Friend,

Hello and welcome. Thank you for providing an opportunity to assist you.

To begin with, please note that bad debts are not limited to the ones that are not recovered from your routine customers for goods sold. Bad debt is anything which is a debt and is not recovered after making reasonable efforts.

In this case, the 40k which you are referring to is a Bad Debt.

Rakhi Vasavada :

Now coming to recording of the same.

Rakhi Vasavada :

In this case, you will pass to first allow and recognize for these bad debts and then to further write it off.

The first step for this would be to record as under:

Bad Debts Expense DR
Allowance for Doubtful Accounts

Rakhi Vasavada :

Now, you will eventually write it off as under:

Allowance for Doubtful Debts DR
Accounts Receivable

Rakhi Vasavada :

I am more than sure this would help. You may please leave a positive rating if this helped as this is the only way we are compensated for helping you. Alternatively, please feel absolutely free to revert back with a reply if you need further assistance.

Warm Regards,

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