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Chapter 8: Q18RQ (page 465)

What is the difference between the percent-of-receivables and aging-of-receivables methods?

Short Answer

Expert verified

Percent-of-receivables method computes bad debts expense as a percentage of Ending balance of accounts receivable. Whereas, aging-of-receivables method computes bad debts expense byapplying a different percentage for each aging category of accounts receivable

Step by step solution

01

Explanation on bad debts expense

The amount which cannot be collected from the credit customers, which is bad debts expense.

02

Difference between percent-of- receivables and aging-of- receivables

SNO

Percent-of-receivable

Ageing-of-receivable

1

Bad debts is calculated on ending balance of accounts receivablemultipliedwith estimated percentage.

Bad debts is calculated by applying different percentage for each aging category of accounts receivable.

2

Single bad debtspercentage is used to estimate bad debts expense.

Each category wise percentage has to assigned.

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Most popular questions from this chapter

What does the accounts receivable turnover ratio measure, and how is it calculated?

Applying the allowance method to account for uncollectibles

The Accounts Receivable balance and Allowance for Bad Debts for Signature Lamp

Company at December 31, 2017, was \(10,800 and \)2,000 (credit balance), respectively.

During 2018, Signature Lamp Company completed the following transactions:

a. Sales revenue on account, \(273,400 (ignore Cost of Goods Sold).

b. Collections on account, \)223,000.

c. Write-offs of uncollectibles, \(5,900.

d. Bad debts expense of \)5,200 was recorded

Requirements

1. Journalize Signature Lamp Company鈥檚 transactions for 2018 assuming Signature Lamp Company uses the allowance method.

2. Post the transactions to the Accounts Receivable, Allowance for Bad Debts, and Bad Debts Expense T-accounts, and determine the ending balance of each account.

3. Show how accounts receivable would be reported on the balance sheet at December 31, 2018.

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

Accounts Payable

\( 328,000

Accounts Receivable, net:

Cash

\) 573,720

April 30, 2018

\( 11,000

Merchandise Inventory:

April 30, 2017

\) 165,000

April 30, 2018

\( 250,000

Cost of Goods Sold

\) 1,200,000

April 30, 2017

\( 210,000

Short-term Investments

\) 148,000

Net Credit Sales Revenue

\( 3,212,000

Other Current Assets

\) 100,000

Long-term Assets

\( 350,000

Other Current Liabilities

\) 188,000

Long-term Liabilities

$ 130,000

Compute Silver鈥檚 (a) acid-test ratio, (b) accounts receivable turnover ratio, and (c) days鈥� sales in receivables for the year ending April 30, 2018. Evaluate each ratio value as strong or weak. Silver sells on terms of net 30. (Round days鈥� sales in receivables to a whole number.)

Consider the following transactions for TLC Company.

2018

Dec. 6 Received a \(8,000, 90-day, 9% note in settlement of an overdue accounts

receivable from Forest Music.

31 Made an adjusting entry to accrue interest on the Forest Music note.

31 Made a closing entry for interest revenue.

2019

Mar. 6 Collected the maturity value of the Forest Music note.

Jun. 30 Loaned \)14,000 cash to Washington Music, receiving a six-month, 12% note.

Oct. 2 Received a $1,000, 60-day, 12% note for a sale to ZZZ Music. Ignore Cost of

Goods Sold.

Dec. 1 ZZZ Music dishonored its note at maturity.

1 Wrote off the receivable associated with ZZZ Music. (Use the allowance

method.)

30 Collected the maturity value of the Washington Music note

In accounting for bad debts, how do the income statement approach and the balance sheet approach differ?
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