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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			\(570
Zack’s Marina	\)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 1–30 days will not be

collected, 20% of invoices 31–60 days, 40% of invoices 61–90 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.

Step by step solution

01

Definition of Bad Debts

A business entity’s expenses for reporting the accounts receivables that are uncollectible are known as bad debt expenses. Such expenses are deducted from the receivables.

02

Calculation of estimated bad debts

a. Percentage of sales method:

$\begin{array}{c}\mathrm{Bad}\mathrm{debts}=\mathrm{Creditsales}×\mathrm{Estimated}\mathrm{uncollectible}\mathrm{percentage}\\ =\mathrm{\$}15,500×4.5\mathrm{\%}\\ =\mathrm{\$}697.5\end{array}$

b. Percent of receivable method:

$\begin{array}{c}\mathrm{Bad}\mathrm{debts}=\mathrm{Account}\mathrm{receivables}×\mathrm{Estimated}\mathrm{uncollectible}\mathrm{percentage}\\ =\mathrm{\$}3,120×22.5\mathrm{\%}\\ =\mathrm{\$}702\end{array}$

c. Aging of receivable method

Amount	Age	Estimated percentage of uncollectible	Uncollectible amounts
$1,900	1-30 days	5%	$95
$345	31-60 days	20%	$69
$375	61-90 days	40%	$150
$500	More than 90 days	75%	$375
Total			$589

03

Journal entries

Date	Particulars	Debit	Credit
June 30, 2019	Allowance for bad debts	$697.5
	Accounts receivable		$697.5

04

Journal entry to write off early start Daycare invoice

Date	Particulars	Debit	Credit
June 30, 2019	Allowance for bad debts $(\mathrm{\$}500×75\mathrm{\%})$	$375
	Accounts receivable		$375

05

T-accounts

For requirement 2:

Accounts Receivable
Sales revenue	$15,500	$697.5	Allowance for bad debts
Balance c/d	$14,802.5

Allowance for bad debts
Accounts receivable	$697.5
Balance c/d	$697.5

For requirement 3:

Accounts Receivable
Sales revenue	$15,500	$375	Allowance for bad debts
Balance c/d	$15,125

Allowance for bad debts
Accounts receivable	$375
Balance c/d	$375

06

Balance sheet

Canyon Canoe
Balance Sheet
As of June 30, 2019
Accounts Receivable	$15,500
Less- Allowance for bad debts	($589)
Net Accounts receivable		$14,911

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