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Chapter 8: Q13RQ (page 465)
When using the allowance method, how are accounts receivable shown on the balance sheet?
Answer
Particular | Amount $ |
Accounts receivables | $xx |
Less: Allowance for doubtful accounts | ($xx) |
Net realizable value | Xx |
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At January 1, 2018, Hilltop Flagpoles had Accounts Receivable of \(28,000, and Allowance for Bad Debts had a credit balance of \)3,000. During the year, Hilltop Flagpoles recorded the following:
a. Sales of \(185,000 (\)164,000 on account; \(21,000 for cash). Ignore Cost of Goods Sold.
b. Collections on account, \)135,000.
c. Write-offs of uncollectible receivables, $2,300.
Requirements
1. Journalize Hilltop鈥檚 transactions that occurred during 2018. The company uses the allowance method.
2. Post Hilltop鈥檚 transactions to the Accounts Receivable and Allowance for Bad Debts T-accounts.
3. Journalize Hilltop鈥檚 adjustment to record bad debts expense assuming Hilltop estimates bad debts as 10% of accounts receivable. Post the adjustment to the appropriate T-accounts.
4. Show how Hilltop Flagpoles will report net accounts receivable on its December 31, 2018, balance sheet
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.
What occurs when a business factors its receivables?
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?
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?
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