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Chapter 8: Q12SE (page 469)
Question: McKale Corporation has a three-month, $18,000, 9% note receivable from L. Peters that was signed on June 1, 2018. Peters defaults on the loan on September 1.
Journalize the entry for McKale to record the default of the loan
Answer
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Applying the direct write-off method to account for uncollectibles
Shawna Valley is an attorney in Los Angeles. Valley uses the direct write-off method to account for uncollectible receivables.
At April 30, 2018, Valley鈥檚 accounts receivable totaled \(19,000. During May, she earned revenue of \)22,000 on account and collected \(15,000 on account. She also wrote off uncollectible receivables of \)1,100 on May 31, 2018.
Requirements
1. Use the direct write-off method to journalize Valley鈥檚 write-off of the uncollectible receivables.
2. What is Valley鈥檚 balance of Accounts Receivable at May 31, 2018?
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. |
How does the percent-of-sales method compute bad debts expense?
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
Accounting for notes receivable and accruing interestLogan Realty loaned money and received the following notes during 2018.Note Date Principal Amount Interest Rate Term
(1) Oct. 1 $ 16,000 7% 1 year
(2) Jun. 30 18,000 18% 9 months
(3) Sep. 19 12,000 8% 90 days
Requirements
1. Determine the maturity date and maturity value of each note.
2. Journalize the entries to establish each Note Receivable and to record collection ofprincipal and interest at maturity. Include a single adjusting entry on December 31,2018, the fiscal year-end, to record accrued interest revenue on any applicable note.Explanations are not required. Round to the nearest dollar.
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