91Ó°ÊÓ

P8-38B Accounting for uncollectible accounts (aging-of-receivables method),

notes receivable, and accrued interest revenue

Relax Recliner Chairs completed the following selected transactions:

2018

Jul. 1 Sold merchandise inventory to Go-Mart, receiving a \(43,000, nine-month,

16% note. Ignore Cost of Goods Sold.

Oct. 31 Recorded cash sales for the period of \)23,000. Ignore Cost of Goods Sold.

Dec. 31 Made an adjusting entry to accrue interest on the Go-Mart note.

31 Made an adjusting entry to record bad debts expense based on an aging

of accounts receivable. The aging schedule shows that \(14,900 of accounts

receivable will not be collected. Prior to this adjustment, the credit balance

in Allowance for Bad Debts is \)10,700.

2019

Apr. 1 Collected the maturity value of the Go-Mart note.

Jun. 23 Sold merchandise inventory to Allure, Corp., receiving a 60-day, 6% note for

\(7,000. Ignore Cost of Goods Sold.

Aug. 22 Allure, Corp. dishonored its note at maturity; the business converted the

maturity value of the note to an account receivable.

Nov. 16 Loaned \)20,000 cash to Tench, Inc., receiving a 90-day, 8% note.

Dec. 5 Collected in full on account from Allure, Corp.

31 Accrued the interest on the Tench, Inc. note.

Record the transactions in the journal of Relax Recliner Chairs. Explanations are not

required. (Round to the nearest dollar.)

Step by step solution

01

Definition of the bad debts allowance method

This is a method in which the company makes estimates of the number of bad debts before the amount becomes due.

02

Journal entries for year 2018

Date	Particulars	Debit	Credit
July 1, 2018	Notes Receivable- Go-Mart	$43,000
	Sales Revenue		$43,000
October 31, 2018	Cash	$23,000
	Sales Revenue		$23,000
December 31, 2018	Interest Receivable	$3,440
	Interest Revenue		$3,440
	($43,000x16%x6/12)
December 31, 2018	Bad Debt Expense	$4,200
	Allowance for Bad Debts		$4,200
	($14,900-$10,700)

03

Journal entries for year 2019

Date	Particulars	Debit	Credit
April 1, 2019	Cash	$48,160
	Interest Revenue		$1,720
	Interest Receivable		$3,440
	Notes Receivable- Go-Mart		$43,000
June 23, 2019	Notes Receivable- Allure corp.	$7,000
	Sales Revenue		$7,000
August 22, 2019	Accounts Receivable- Allurecorp.	$7,070
	Interest Revenue ($7000 x6%x60/365)		$70
	Notes Receivable- Allure corp.		$7,000
November 16, 2019	Notes Receivable- Crosby Inc.	$20,000
	Cash		$20,000
December 5, 2019	Cash	$7,070
	Accounts Receivables- Appeal Corp.		$7,070
December 31, 2019	Interest Receivable	$197
	Interest Revenue		197
	($20,000 x8%x45/365)

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