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Chapter 7: Question: E7-7 (page 366)

(Recording Bad Debts) Duncan Company reports the following financial information before adjustments.

Debit

Credit

Accounts receivables

\(100,000

Allowance for doubtful accounts

\)2,000

Sales revenue (All on credit)

900,000

Sales return and allowance

50,000

Instructions

Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit balance.

Short Answer

Expert verified

The total debit and credit side of the journal is$9,500.

Step by step solution

01

Definition of Sales return and Allowances

Sales return and allowance account is a contra-revenue account reporting defective goods or defective orders returned by a customer.

02

Journal Entries

Date

Accounts and explanation

Debit $

Credit $

a

Bad debt expenses

$3,000

Allowance for doubtful accounts

$3,000

b

Bad debt expenses

$6,500

Allowance for doubtful accounts

$6,500

Working note:

1. Calculation of allowance:Allowancefordoubtfulaccounts=Accountsreceivables脳Estimatedbaddebtpercentage-Creditbalanceofallowance=$100,000脳5%-2000=$3,000


2. Calculation of allowance:


Allowancefordoubtfulaccounts=Accountsreceivables脳Estimatedbaddebtpercentage+Debitbalanceofallowance=$10,000脳5%+1500=$6,500

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Most popular questions from this chapter

On July 1, 2017, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Moresan will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2018.

On September 1, 2017, Moresan sold special-order merchandise on credit and received in return a zero-interest-bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on August 31, 2019.

Moresan also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2017, some trade accounts receivable were assigned to Indigo Finance Company on a non-notification (Moresan handles collections) basis for an advance of 75% of their amount at an interest charge of 8% on the balance outstanding.

On November 1, 2017, other trade accounts receivable were sold without recourse. The factor withheld 5% of the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge of 3%.

Instructions

(b) How should Moresan report the interest-bearing note receivable and the zero-interest-bearing note receivable on its balance sheet at December 31, 2017?

Horizon Outfitters Company includes in its trial balance for December 31 an item for Accounts Receivable \(789,000. This balance consists of the following items:

Due from regular customer

\)523,000

Refund receivable on prior year鈥檚 income taxes (an established claim)

15,500

Travel advance to employees

22,000

Loan to wholly owned subsidiary

45,500

Advance to creditor for goods ordered

61,000

Accounts receivables assigned security for loans payable

75,000

Notes receivable past due plus interest on these notes

47,000

Total

$789,000

Illustrate how these items should be shown in the balance sheet as of December 31.

Manilow Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Manilow鈥檚 Accounts Receivable account was \(555,000 and Allowance for Doubtful Accounts had a credit balance of \)40,000. The year-end balance reported in the balance sheet for Allowance for Doubtful Accounts will be based on the aging schedule shown below.

Days Account Outstanding

Amount

Probability of Collection

Less than 16 days

$300,000

.98

Between 16 and 30 days

100,000

.90

Between 31 and 45 days

80,000

.85

Between 46 and 60 days

40,000

.80

Between 61 and 75 days

20,000

.55

Over 75 days

15,000

.00

Instructions

(a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end?

(b) Show how accounts receivable would be presented on the balance sheet.

(c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income?

(Journalizing Various Receivable Transactions) Presented below is information related to James Garfield Corp., which sells merchandise with terms 2/10, net 60. Garfield records its sales and receivables net.

July 1 James Garfield Corp. sold to Warren Harding Co. merchandise having a sales price of \(8,000.

5 Accounts receivable of \)9,000 (gross) are factored with Andrew Jackson Credit Corp. without recourse at a financing charge of 9%. Cash is received for the proceeds; collections are handled by the finance company. (These accounts were all past the discount period.)

9 Specific accounts receivable of \(9,000 (gross) are pledged to Alf Landon Credit Corp. as security for a loan of \)6,000 at a finance charge of 6% of the amount of the loan. The finance company will make the collections. (All the accounts receivable are past the discount period.)

Dec. 29 Warren Harding Co. notifies Garfield that it is bankrupt and will pay only 10% of its account. Give the entry to write off the uncollectible balance using the allowance method. (Note: First record the increase in the receivable on July 11 when the discount period passed.)

Instructions

Prepare all necessary entries in general journal form for Garfield Corp

What is the accounts receivable turnover, and what type of information does it provide?
See all solutions

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