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Chapter 8: 16RQ (page 465)

How does the percent-of-sales method compute bad debts expense?

Short Answer

Expert verified

The formula used for the calculation of bad debt under the percent-of-sales method:

Baddebtexpenses=Netcreditsales脳estimatedpercentageofbaddebts

Step by step solution

01

Step 1: Definition of Bad Debt Expenses

A business entity鈥檚 expenses for reporting the accounts receivables that are uncollectible are known as bad debt expenses. Such expenses are deducted from the receivables.

02

Calculation of bad debts expenses using the percent of sales method

The business entity determines the bad debt expenses by taking the product of the net credit sales and the estimated percentage of bad debts. The estimated percentage depends upon the historical data on bad debts.

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Most popular questions from this chapter

Accounting for uncollectible accounts using the allowance method (aging-of-receivables) and reporting receivables on the balance sheet.

At December 31, 2018, the Accounts Receivable balance of GPS Technology is \(200,000. The Allowance for Bad Debts account has a \)24,110 debit balance. GPS Technology prepares the following aging schedule for its accounts receivable:

Age of Accounts

1鈥�30 Days

31鈥�60 Days

61鈥�90 Days

Over 90 Days

Accounts Receivable

\( 65,000

\) 50,000

\(40,000

\)45,000

Estimated percent uncollectible

0.4%

3.0%

5.0%

48.0%

Requirement:

1. Journalize the year-end adjusting entry for bad debts on the basis of the aging schedule. Show the T-account for the Allowance for Bad Debts at December 31, 2018.

2. Show how GPS Technology will report its net accounts receivable on its December 31, 2018, balance sheet

Question: Silver Clothiers reported the following selected items at April 30, 2018 (last year鈥檚鈥�2017鈥攁mounts also given as needed):

Accounts Payable

\( 328,000

Accounts Receivable, net:

Cash

\) 573,720

April 30, 2018

\( 11,000

Merchandise Inventory:

April 30, 2017

\) 165,000

April 30, 2018

\( 250,000

Cost of Goods Sold

\) 1,200,000

April 30, 2017

\( 210,000

Short-term Investments

\) 148,000

Net Credit Sales Revenue

\( 3,212,000

Other Current Assets

\) 100,000

Long-term Assets

\( 350,000

Other Current Liabilities

\) 188,000

Long-term Liabilities

$ 130,000

Compute Silver鈥檚 (a) acid-test ratio, (b) accounts receivable turnover ratio, and (c) days鈥� sales in receivables for the year ending April 30, 2018. Evaluate each ratio value as strong or weak. Silver sells on terms of net 30. (Round days鈥� sales in receivables to a whole number.)

Accounting for uncollectible accounts using the allowance (percent of-sales) and direct write-off methods and reporting receivables on thebalance sheet

On August 31, 2018, Forget-Me-Not Floral Supply had a \(140,000 debit balance inAccounts Receivable and a \)5,600 credit balance in Allowance for Bad Debts. DuringSeptember, Forget-Me-Not made the following transactions:

鈥� Sales on account, \(530,000. Ignore Cost of Goods Sold.

鈥� Collections on account, \)573,000.

鈥� Write-offs of uncollectible receivables, $6,000.

Requirements

1. Journalize all September entries using the allowance method. Bad debts expense wasestimated at 2% of credit sales. Show all September activity in Accounts Receivable,Allowance for Bad Debts, and Bad Debts Expense (post to these T-accounts).

2. Using the same facts, assume that Forget-Me-Not used the direct write-off methodto account for uncollectible receivables. Journalize all September entries using thedirect write-off method. Post to Accounts Receivable and Bad Debts Expense, andshow their balances at September 30, 2018.

3. What amount of Bad Debts Expense would Forget-Me-Not report on its Septemberincome statement under each of the two methods? Which amount better

matches expense with revenue? Give your reason.

4. What amount of net accounts receivable would Forget-Me-Not report on its September

30, 2018, balance sheet under each of the two methods? Which amount ismore realistic? Give your reason

In accounting for bad debts, how do the income statement approach and the balance sheet approach differ?

When a receivable is written off under the allowance method, how does it affect the net realizable value shown on the balance sheet?
See all solutions

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