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Chapter 8: Q28PGA (page 475)

Accounting for uncollectible accounts using the allowance (percent of-sales) and direct write-off methods and reporting receivables on the

balance sheet

On August 31, 2018, Bouquet Floral Supply had a \(140,000 debit balance in AccountsReceivable and a \)5,600 credit balance in Allowance for Bad Debts. During September,

Bouquet made:

鈥� Sales on account, \(550,000. Ignore Cost of Goods Sold.

鈥� Collections on account, \)584,000.

鈥� Write-offs of uncollectible receivables, $4,000.

Requirements

1. Journalize all September entries using the allowancemethod. 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 Bouquet used the direct write-off method toaccount for uncollectible receivables. Journalize all September entries using thedirect write-offmethod. Post to Accounts Receivable and Bad Debts Expense, andshow their balances at September 30, 2018.

3. What amount of Bad Debts Expense would Bouquet report on its Septemberincome statement under each of the two methods? Which amount better matchesexpense with revenue? Give your reason.

4. What amount of netaccounts receivable would Bouquet report on its September30, 2018, balance sheet under each of the two methods? Which amount is morerealistic? Give your reason.

Short Answer

Expert verified
  1. The amount of bad debt expense is $11,000.
  2. The amount of allowance of bad debts is $4,000.
  3. The allowance method is best matches the expenses.
  4. The allowance method amount is more realistic.

Step by step solution

01

Definition of bad debts

Bad debt is the amount that is not received from the customers. The amount of the bad debt occurs when the company sold goods on credit to customers.

02

Allowance method

Date

Particulars

Debit

Credit

September 30

Accounts Receivable

$550,000

Sales Revenue

$550,000

(To entry to record sale)

September 30

Cash

$584,000

Accounts Receivable

$584,000

(To entry to record the cash receipts)

September 30

Allowance for Bad Debts

$4,000

Accounts Receivable

$4,000

(To record allowance)

September 30

Bad Debt Expense

$11,000

Allowance for Bad Debts

$11,000

(To record bad debt expense)

Accounts Receivable

Details

Debit

Details

Credit

Balance September 1, 2018

$140,000

Cash

$584,000

Sales Revenue

$550,000

Allowance for bad debts

$4,000

Balance September 30, 2018

$102,000

Allowance for Bad Debts Account

Details

Debit

Details

Credit

Accounts Receivable

$4,000

Balance September 1, 2018

$5,600

Bad Debts Expense

$11,000

Balance September 30, 2018

$12,600

Bad Debt Expense

Details

Debit

Details

Credit

Allowance for Bad Debts

$11,000

03

Direct write-off method

Date

Particulars

Debit

Credit

September 30

Accounts Receivable

$550,000

Sales Revenue

$550,000

(To record sale)

September 30

Cash

$584,000

Accounts Receivable

$584,000

(To record the cash receipts)

September 30

Bad Debts Expense

$4,000

Accounts Receivable

$4,000

(To record allowance)

Bad Debt Expense

Details

Debit

Details

Credit

Accounts Receivable

$4,000

Accounts Receivable

Details

Debit

Details

Credit

Balance September 1, 2018

$140,000

Cash

$584,000

Sales Revenue

$550,000

Bad Debt Expense

$4,000

Balance September 30, 2018

$24,000

04

Income statement

Allowance Method:

Income Statement: $11,000

Direct Write-off Method:

Income Statement: $4,000

The allowance method best matches bad debt expenses with revenue because the allowance method bad debt expenses are estimated and recorded before the occurrence of bad debts. It records the bad debt expense in the same year of sale.

05

Balance sheet

Amount of accounts receivable shown in the balance sheet:

Allowance method: $89,400

Balance sheet extract

as on 30 September 2018

ASSETS

CURRENT ASSETS

Accounts receivable

$1,02,000

Less: allowance for bad debts

($12,600)

$89,400

Direct write-off method: $24,000

The net allowance method is more correct because it shows the right amount of receivables.

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Most popular questions from this chapter

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.

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.

When using the allowance method, what account is debited when writing off uncollectible accounts? How does this differ from the direct write-off method?

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.

Applying the allowance method (percent-of-sales) to account for Uncollectibles

During its first year of operations, Fall Wine Tour earned net credit sales of \(311,000. Industry experience suggests that bad debts will amount to 3% of net credit sales. At December 31, 2018, accounts receivable total \)44,000. The company uses the allowance method to account for uncollectibles.

Requirements

1. Journalize Fall Wine Tour鈥檚 Bad Debts Expense using the percent-of-sales method.

2. Show how to report accounts receivable on the balance sheet at December 31, 2018
See all solutions

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