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Chapter 7: 4E (page 365)

Your accounts receivable clerk, Mitra Adams, to whom you pay a salary of \(1,500 per month, has just purchased a new Acura. You decide to test the accuracy of the accounts receivable balance of \)82,000 as shown in the ledger.

The following information is available for your first year in business.

(1) Collection from customer $198,000.

(2) Merchandise purchased 320,000.

(3) Ending merchandise inventory by 90,000.

(4) Goods are marked to sell at 40% above cost.

Instructions

Compute an estimate of the ending balance of accounts receivable from customers that should appear in the ledger and any apparent shortages. Assume that all sales are made on the account.

Short Answer

Expert verified

The actual balance of receivables is equal to $124,000.

Step by step solution

01

Definition of Cost of Goods Sold

Cost of goods sold is a line item determining the cost incurred for converting goods from raw material to finished goods that the company sells. It is reported in the income statement.

02

Determination of actual balance

Particular

Amount $

Merchandise purchased

$320,000

Less: Ending merchandise inventory

(90,000)

Cost of goods sold

230,000

Sales value (140% of $230,000)

322,000

Less: Collection from customers

(198,000)

Ending balance of receivables

$124,000

03

Difference

Particular

Amount $

Uncollected balance

$124,000

Less: Balance as per ledger

(82,000)

Apparent shortage

$42,000

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Most popular questions from this chapter

(Transfer of Receivables with Recourse) Ames Quartet Inc. factors receivables with a carrying amount of \(200,000 to Joffrey Company for \)160,000 on a with recourse basis.

When is the financial components approach to recording the transfers of receivables used? When should a transfer of receivables be recorded as a sale?

(Recording Bad Debts) At the end of 2017, Aramis Company has accounts receivable of \(800,000 and an allowance for doubtful accounts of \)40,000. On January 16, 2018, Aramis Company determined that its receivable from Ramirez Company of $6,000 will not be collected, and management authorized its write-off.

Instructions

(a) Prepare the journal entry for Aramis Company to write off the Ramirez receivable.

(b) What is the net realizable value of Aramis Company鈥檚 accounts receivable before the write-off of the Ramirez receivable?

(c) What is the net realizable value of Aramis Company鈥檚 accounts receivable after the write-off of the Ramirez receivable?

Indicate how the percentage-of-receivables method, based on an aging schedule, accomplishes the objectives of the allowance method of accounting for bad debts. What other methods, besides an aging analysis, can be used for estimating uncollectible accounts?

Indicate three reasons why a company might sell its receivables to another company.
See all solutions

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