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Chapter 8: Q12RQ (page 465)
When is bad debts expense recorded when using the allowance method?
Answer
Under the allowance method, bad debt expenses are recorded at year-end while preparing the adjusting entries.
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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.
Dialex Watches completed the following selected transactions during 2018 and 2019:
2018
Dec. 31 Estimated that bad debts expense for the year was 3% of credit sales of
\(410,000 and recorded that amount as expense. The company uses the
allowance method.
31 Made the closing entry for bad debts expense.
2019
Jan. 17 Sold merchandise inventory to Marty White, \)400, on account. Ignore Cost of
Goods Sold.
Jun. 29 Wrote off Marty White鈥檚 account as uncollectible after repeated efforts to
collect from him.
Aug. 6 Received \(400 from Marty White, along with a letter apologizing for being
so late. Reinstated White鈥檚 account in full and recorded the cash receipt.
Dec. 31 Made a compound entry to write off the following accounts as uncollectible:
Barry Krisp, \)1,600; Maria Bryant, \(1,100; and Richard Renik, \)400.
31 Estimated that bad debts expense for the year was 3% on credit sales of
\(490,000 and recorded the expense.
31 Made the closing entry for bad debts expense.
Requirements
1.Open T-accounts for Allowance for Bad Debts and Bad Debts Expense, assuming
the accounts begin with a zero balance. Record the transactions in the general
journal (omit explanations), and post to the two T-accounts.
2.Assume the December 31, 2019, balance of Accounts Receivable is \)136,000. Show
how net accounts receivable would be reported on the balance sheet at that date.
Accounting for uncollectible accounts using the allowance method
This problem continues the Canyon Canoe Company situation from Chapter 7.
Canyon Canoe Company has experienced rapid growth in its first few months of operations and has had a significant increase in customers renting canoes and purchasing T-shirts. Many of these customers are asking for credit terms. Amber and Zack Wilson, stockholders and company managers, have decided it is time to review their business transactions and update some of their business practices. Their first step is to make decisions about handling accounts receivable.
So far, year-to-date credit sales have been \(15,500. A review of outstanding
receivables resulted in the following aging schedule:
Age of Accounts as of June 30, 2019 | |||||
Customer name | 1-30 days | 31-60 days | 61-90 days | Over 90 days | Total balance |
Canyon | \)250 | \(250 | |||
Crazy trees | \)200 | \(150 | \)350 | ||
Early start Daycare | \(500 | ||||
Lakefront Pavilion | \)575 | \(500 | \)575 | ||
Outdoor Center | \(300 | \)300 | |||
Rivers Canoe Club | \(350 | \)350 | |||
Sport Shirts | \(450 | \)120 | \(570 | ||
Zack鈥檚 Marina | \)75 | \(75 | \)225 | ||
Totals | \(1,900 | \)345 | \(375 | \)500 | $3,120 |
Requirements
1. The company wants to use the allowance method to estimate bad debts. Determine the estimated bad debts expense under the following methods at June 30, 2019. Assume a zero-beginning balance for Allowance for Bad Debts. Round to the nearest dollar.
a. Percent-of-sales method, assuming 4.5% of credit sales will not be collected.
b. Percent-of-receivables method, assuming 22.5% of receivables will not be
collected.
c. Aging-of-receivables method, assuming 5% of invoices 1鈥�30 days will not be
collected, 20% of invoices 31鈥�60 days, 40% of invoices 61鈥�90 days, and 75% of
invoices over 90 days.
2. Journalize the entry at June 30, 2019, to adjust for bad debts expense using the percent-of-sales method.
3. Journalize the entry at June 30, 2019, to record the write-off of the Early Start Daycare invoice.
4. At June 30, 2019, open T-accounts for Accounts Receivable and Allowance for Bad Debts before Requirements 2 and 3. Post entries from Requirements 2 and 3 to those accounts. Assume a zero beginning balance for Allowance for Bad Debts.
5. Show how Canyon Canoe Company will report net accounts receivable on the balance sheet on June 30, 2019.
When a receivable is written off under the allowance method, how does it affect the net realizable value shown on the balance sheet?
What is the difference between accounts receivable and notes receivable?
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