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Chapter 8: 6SE (page 467)

Applying the allowance method (percent-of-sales) to account for Uncollectibles

During its first year of operations, Fall Wine Tour earned net credit sales of \(311,000. Industry experience suggests that bad debts will amount to 3% of net credit sales. At December 31, 2018, accounts receivable total \)44,000. The company uses the allowance method to account for uncollectibles.

Requirements

1. Journalize Fall Wine Tour鈥檚 Bad Debts Expense using the percent-of-sales method.

2. Show how to report accounts receivable on the balance sheet at December 31, 2018

Short Answer

Expert verified

The percent-of-sales method computes bad debts expense as a percentage of net credit sales.

It鈥檚 a one of the method widely used to estimate the bad debts expenses.

Bad Debts expenses = $311,000* 3%

= $ 9,330

Step by step solution

01

Requirement 1: Journalize the transactions of Fall Wine

Date

Account and explanation

Debit

Credit

2018

Accounts receivable

Sales Revenue

(Sold goods on account)

$ 311,000

$ 311,000

Cash

Sales Revenue

(Sold goods on account)

$ 267,000

$267,000

Allowance for Bad Debts

Accounts Receivable

(Wrote off an uncollectible account)

$ 9,330

$ 9,330

02

Requirement 2: report net accounts receivable on its December 31, 2018

笔补谤迟颈肠耻濒补谤鈥檚

As at December, 2018

Accounts Receivable

Less: Allowance for Bad Debts

$ 44,000

$ (9,330)

Net Realizable Value

$34,670

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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

What occurs when a business pledges its receivables?

Defining common receivables terms

Match the terms with their correct definition.

Terms Definitions

1. Accounts receivable

a. The party to a credit transaction who takes on an obligation/payable.

2. Other receivables

b. The party who receives a receivable and will collect cash in the future.

3. Debtor

c. A written promise to pay a specified amount of money at a particular future date.

4. Notes receivable

d. The date when the note receivable is due.

5. Maturity date

e. A miscellaneous category that includes any other type of receivable where there is a right to receive cash in the future

6. Creditor

f. The right to receive cash in the future from customers for goods sold or for services performed.

On August 1, Taylor Company lent $80,000 to L. King on a 90-day, 5% note.

12. Journalize for Taylor Company the lending of the money on August 1.

13. Journalize the collection of the principal and interest at maturity. Specify the date. Round interest to the nearest dollar.

Recording credit sales and collections

Steller Corporation had the following transactions in June:

Jun .1

Sold merchandise inventory on account to Carter Company, \(1,575.

6

Sold merchandise inventory for cash, \)550

12

Received cash from Carter Company in full settlement of its accounts receivable

20

Sold merchandise inventory on account to Iris Company, \(765

22

Sold merchandise inventory on account to Driver Company, \)230

28

Received cash from Iris Company in partial settlement of its accounts receivable, \(300

Requirements

1. Journalize the transactions. Ignore Cost of Goods Sold. Omit explanations.

2. Post the transactions to the general ledger and the accounts receivable subsidiary

ledger. Assume all beginning balances are \)0.

3. Verify the ending balance in the control Accounts Receivable equals the sum of the

balances in the subsidiary ledger.
See all solutions

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