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Chapter 8: 17E (page 432)

On June 1, 2018, Best Performance Cell Phones sold \(21,000 of merchandise to Anthony Trucking Company on account. Anthony fell on hard times and on July 15 paid only \)5,000 of the account receivable. After repeated attempts to collect, Best Performance finally wrote off its accounts receivable from Anthony on September 5. Six months later, on March 5, 2019, Best Performance received Anthony鈥檚 check for $16,000 with a note apologizing for the late payment.

Requirements

1. Journalize the transactions for Best Performance Cell Phones using the direct write-off method. Ignore Cost of Goods Sold.

2. What are some limitations that Best Performance will encounter when using the direct write-off method?

Short Answer

Expert verified

(1) The journal entries are recorded in Step 1.

(2) The three limitations of the direct write-off method are:

  • It violates the Matching Principle
  • The profitability may not accurate
  • Overstatement of accounts receivable

Step by step solution

01

Journal entry of the transactions

Step 1:Journal entry of the transactions

Date

Particulars

Debit

Credit

June 1

Accounts Receivables鈥擜nthony

$21,000

Sales Revenue

$21,000

(Being sold goods on account)

June 15

Cash

$5,000

Accounts Receivables鈥擜nthony

$5,000

(Being cash received from Anthony)

September 5

Bad Debt Expense

$16,000

Accounts Receivable鈥擜nthony

$16,000

(Being accounts receivables become bad debt)

2019

March 5

Accounts Receivable鈥擜nthony

$16,000

Bad Debt Expense

$16000

(Being entry reinstated of bad debts)

March 5

Cash

$16,000

Accounts Receivable

$16,000

(Being entry of bad debt recovered)

02

Limitations that Best Performance will encounter using the Direct Method.

Violates the Matching Principle

The matching principle states that the related expenses need to be provided with a related income. In the direct write-off method, bad debts are charged only when a company determines that a customer will not pay in the future, irrespective of the revenue booked.

Profitability may not accurate

As expenses are not matched with the revenue, expenses provision will shift from one year to another year. Due to this, correct profitability may not be presented in financial statements.

Overstatement of Accounts receivable

Accounts Receivable will be overstated as a company鈥檚 accounts receivables may contain the uncollectible portion but the related provisions were not made or not written off.

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Most popular questions from this chapter

Sleepy Recliner Chairs completed the following selected transactions:

2018

Jul. 1 Sold merchandise inventory to Stan-Mart, receiving a \(41,000, nine-month, 8%

note. Ignore Cost of Goods Sold.

Oct. 31 Recorded cash sales for the period of \)24,000. Ignore Cost of Goods Sold.

Dec. 31 Made an adjusting entry to accrue interest on the Stan-Mart note.

31 Made an adjusting entry to record bad debts expense based on an aging

of accounts receivable. The aging schedule shows that \(13,800 of accounts

receivable will not be collected. Prior to this adjustment, the credit balance in

Allowance for Bad Debts is \)11,800.

2019

Apr. 1 Collected the maturity value of the Stan-Mart note.

Jun. 23 Sold merchandise inventory to Appeal, Corp., receiving a 60-day, 6% note for

\(7,000. Ignore Cost of Goods Sold.

Aug. 22 Appeal, Corp. dishonoured its note at maturity; the business converted the

maturity value of the note to an account receivable.

Nov. 16 Loaned \)17,000 cash to Crosby, Inc., receiving a 90-day, 16% note.

Dec. 5 Collected in full on account from Appeal, Corp.

31 Accrued the interest on the Crosby, Inc. note.

Record the transactions in the journal of Sleepy Recliner Chairs. Explanations are not

required. (Round to the nearest dollar.)

Applying the allowance method (aging-of-receivables) to account for Uncollectibles Surf and Sun had the following balances at December 31, 2018, before the year-end adjustments:

Accounts Receivable

81,000

Allowance for Bad Debts

Bal. \( 2,063

The aging of accounts receivable yields the following data:

Age of Accounts Receivable

0鈥�60 Days

Over 60 Days

Total Receivables

Accounts Receivable

\) 78,000

\( 3,000

\) 81,000

Estimated percent uncollectible

*2%

* 23%

Requirements

1. Journalize Surf and Sun鈥檚 entry to record bad debts expense for 2018 using the aging-of-receivables method.

2. Prepare a T-account to compute the ending balance of Allowance for Bad Debts.

This problem continues the Crystal Clear Cleaning problem begun in Chapter 2 and

continued through Chapter 7.

Crystal Clear Cleaning uses the allowance method to estimate bad debts. Consider the following April 2019 transactions for Crystal Clear Cleaning:

Apr. 1 Performed cleaning service for Debbie鈥檚 D-list for \(13,000 on account with

terms n/20.

10 Borrowed money from First Regional Bank, \)30,000, making a 180-day, 12% note.

12 After discussions with customer More Shine, Crystal Clear has determined that

\(230 of the receivable owed will not be collected. Wrote off this portion of the

receivable.

15 Sold goods to Warner for \)9,000 on account with terms n/30. Cost of Goods Sold

was \(4,500.

28 Sold goods to Lelaine, Inc. for cash of \)2,800 (cost \(840).

28 Collected from More Shine, \)230 of receivable previously written off.

29 Paid cash for utilities of \(150.

30 Created an aging schedule for Crystal Clear Cleaning for accounts receivable.

Crystal Clear determined that \)7,000 of receivables outstanding for 1鈥�30 days

were 3% uncollectible, \(10,000 of receivables outstanding for 31鈥�60 days were

20% uncollectible, and \)5,870 of receivables outstanding for more than 60 days

were 30% uncollectible. Crystal Clear Cleaning determined the total amount of

estimated uncollectible receivables and adjusted the Allowance for Bad Debts.

Assume the account had an unadjusted credit balance of $260. (Round to

nearest whole dollar.)

Requirements

1. Prepare all required journal entries for Crystal Clear. Omit explanations.

2. Show how net accounts receivable would be reported on the balance sheet as of

April 30, 2019.

Evaluating ratio data

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

Requirements

1. Calculate Abanaki鈥檚 acid-test ratio for 2018. (Round to two decimals.) Determine whether Abanaki鈥檚 acid-test ratio improved or deteriorated from 2017 to 2018. How does Abanaki鈥檚 acid-test ratio compare with the industry average of 0.80?

2. Calculate Abanaki鈥檚 accounts receivable turnover ratio. (Round to two decimals.) How does Abanaki鈥檚 ratio compare to the industry average accounts receivable turnover of 10?

3. Calculate the days鈥� sales in receivables for 2018. (Round to the nearest day.) How do the results compare with Abanaki鈥檚 credit terms of net 30?

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

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