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Chapter 8: Q20RQ (page 465)
What is the formula to compute interest on a note receivable?
Interest is computed by multiplying notes receivable value with interest rate and time period.
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How does the percent-of-sales method compute bad debts expense?
At September 30, 2018, the accounts of Green Terrace Medical Center (GTMC)
include the following:
Accounts Receivable \( 145,000
Allowance for Bad Debts (credit balance) 3,500
During the last quarter of 2018, GTMC completed the following selected transactions:
鈥� Sales on account, \)450,000. Ignore Cost of Goods Sold.
鈥� Collections on account, \(427,100
鈥� Wrote off accounts receivable as uncollectible: Regan, Co., \)1,400; Owen Reis, \(800;
and Patterson, Inc., \)700
鈥� Recorded bad debts expense based on the aging of accounts receivable, as follows:
Age of Accounts
1鈥�30 Days 31鈥�60
Days
61鈥�90
Days
Over 90
Days
Accounts Receivable \( 104,000 \) 39,000 \( 14,000 \) 8,000
Estimated percent uncollectible 0.3% 3% 30% 35%
Requirements
1. Open T-accounts for Accounts Receivable and Allowance for Bad Debts.
Journalize the transactions (omit explanations) and post to the two accounts.
2. Show how Green Terrace Medical Center should report net accounts receivable on
its December 31, 2018, balance sheet.
What is the difference between the percent-of-receivables and aging-of-receivables methods?
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.
Professional Steam Cleaning performs services on account. When a customer account becomes four months old, Professional converts the account to a note receivable. During 2018, the company completed the following transactions:
2018 | |
Apr.28 | Performed service on account for Parkview Club, \(18,000. |
Sep. 1 | Received an \)18,000, 60-day, 12% note from Parkview Club in satisfaction of its past-due account receivable. |
Oct. 31 | Collected the Parkview Club note at maturity |
Record the transactions in Professional鈥檚 journal. Round to the nearest dollar.
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