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Chapter 8: Problem 11

Journalize the following transactions in the accounts of Linden Company, a restaurant supply company that uses the allowance method of accounting for uncollectible receivables: Feb. 20. Sold merchandise on account to Darlene Brogan, \(\$ 12,100\). The cost of the merchandise sold was \(\$ 7,260\). May 30. Received \(\$ 6,000\) from Darlene Brogan and wrote off the remainder owed on the sale of February 20 as uncollectible. Aug. 3. Reinstated the account of Darlene Brogan that had been written off on May 30 and received \(\$ 6,100\) cash in full payment.

Short Answer

Expert verified
Record sales and cost of goods; write off uncollectible amounts; reinstate and collect payment.

Step by step solution

01

Record the Sale and Cost of Goods Sold

On February 20, record the sale of merchandise on account to Darlene Brogan: Debit Accounts Receivable $12,100 and credit Sales Revenue $12,100. Additionally, record the cost of goods sold by debiting Cost of Goods Sold $7,260 and crediting Inventory $7,260.
02

Record the Partial Payment and Write-off

On May 30, record the receipt of $6,000 from Darlene Brogan: Debit Cash $6,000 and credit Accounts Receivable $6,000. Simultaneously, write off the remaining uncollectible amount by debiting Allowance for Doubtful Accounts $6,100 and crediting Accounts Receivable $6,100.
03

Reinstatement of Account and Final Payment

On August 3, reinstate the previously written-off account: Debit Accounts Receivable $6,100 and credit Allowance for Doubtful Accounts $6,100. Then, record the receipt of $6,100 in full payment: Debit Cash $6,100 and credit Accounts Receivable $6,100.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Allowance Method
The allowance method is an accounting technique used to manage uncollectible receivables. It anticipates potential losses from customers who may not pay their debts. Before any account becomes uncollectible, an estimate is made of what might not be collected. This amount is then set aside as an allowance for doubtful accounts.
This method is particularly useful because it matches expenses with revenues in the same period, providing a more accurate picture of financial health.
  • The key concept is foresight rather than hindsight. Instead of waiting to see which accounts are uncollectible, you plan for it.
  • It is a conservative approach that prevents overstating assets and income. In the allowance method, a company reviews past data to estimate the percentage of receivables unlikely to be collected.
By using this method, companies are able to be financially prepared for potential write-offs.
Accounts Receivable
Accounts receivable (A/R) represent the money owed to a company from its customers for goods or services delivered on credit. This is recorded as an asset on the balance sheet, indicating a future inflow of funds.
It's crucial for businesses to manage their accounts receivable efficiently to maintain cash flow. Without proper management, unpaid invoices can pile up and negatively impact liquidity.
  • Decisions about whether to sell on credit should consider both the potential revenue and the risk of non-payment.
  • By monitoring accounts receivable, financial managers can make informed decisions on extending further credit to customers or pursuing collections.
Accounts receivable management is an integral part of the allowance method, ensuring that any uncollectible accounts do not take a severe toll on the business's finances.
Uncollectible Receivables
Uncollectible receivables, also known as bad debts, occur when it becomes improbable that an account receivable will be collected. All businesses face this challenge, and how they handle these debts can significantly impact profitability.
Here are some essential points about uncollectible receivables:
  • Writing off an account means recognizing that a debt is uncollectible, removing it from accounts receivable, and considering it a loss.
  • Not having a plan for uncollectible receivables can lead to unpredictable financial results and mismanagement of resources.
Using the allowance method not only anticipates these losses in advance but also builds a buffer against them. This way, unexpected write-offs have minimal impact on the overall financial condition.
Cost of Goods Sold
Cost of goods sold (COGS) refers to the direct costs attributed to the production of the goods sold by a company. This includes the cost of the materials and labor directly used to create the product. Cost of goods sold is a crucial metric in determining the gross profit.
COGS can include a variety of expenses:
  • Cost of raw materials used in production.
  • Direct labor costs of employees involved in the manufacturing process.
  • Overhead that relates directly to the production.
Calculating COGS accurately provides critical insights into pricing, spending efficiency, and overall business strategy. By calculating COGS, a business can understand its profitability and ensure it is covering the costs of production adequately. This is essential for both setting appropriate sales prices and planning for future production.

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Most popular questions from this chapter

Herman's Auto Supply distributes new and used automobile parts to local dealers throughout the Midwest. Herman's credit terms are \(n / 30\). As of the end of business on July 31 , the following accounts receivable were past due. \begin{tabular}{llr} Account & Due Date & Amount \\ \hline Bear Creek Body Shop & June 8 & \(\$ 3,000\) \\ First Auto & July 3 & 2,500 \\ Kaiser Repair & March 20 & 500 \\ Master's Auto Repair & May 15 & 1,000 \\ Richter Auto & June 18 & 750 \\ Sabol's & April 12 & 1,800 \\ Uptown Auto & May 8 & 500 \\ Westside Repair \& Tow & May 31 & 1,100 \end{tabular} Determine the number of days each account is past due.

Journalize the following transactions in the accounts of Graybeal Co., a hospital supply company that uses the direct write-off method of accounting for uncollectible receivables: July 6. Sold merchandise on account to Dr. Jerry Jagers, \(\$ 18,500\). The cost of the merchandise sold was \(\$ 11,100\). Sept. 12. Received \(\$ 9,000\) from Dr. Jerry Jagers and wrote off the remainder owed on the sale of July 6 as uncollectible. Dec. 20. Reinstated the account of Dr. Jerry Jagers that had been written off on September 12 and received \(\$ 9,500\) cash in full payment.

The accounts receivable clerk for Intimacy Mattress Company prepared the following partially completed aging-of-receivables schedule as of the end of business on November 30 . The following accounts were unintentionally omitted from the aging schedule. \begin{tabular}{lrl} Customer & Balance & Due Date \\ \hline Janzen Industries & \(\$ 40,000\) & August 29 \\ Kuehn Company & 8,500 & September 3 \\ Mauer Inc. & 18,000 & October 21 \\ Pollack Company & 6,500 & November 23 \\ Simrill Company & 7,500 & December 3 \end{tabular} a. Determine the number of days past due for each of the preceding accounts. b. Complete the aging-of-receivables schedule by including the omitted amounts.

During its first year of operations, O'Hara Automotive Supply Co. had net sales of \(\$ 4,050,000\), wrote off \(\$ 112,350\) of accounts as uncollectible using the direct write-off method, and reported net income of \(\$ 212,800\). If the allowance method of accounting for uncollectibles had been used, \(21 / 2 \%\) of net sales would have been estimated as uncollectible. Determine what the net income would have been if the allowance method had been used.

Kubota Co. is a wholesaler of office supplies. An aging of the company's accounts receivable on December 31,2006 , and a historical analysis of the percentage of uncollectible accounts in each age category are as follows: \begin{tabular}{lrc} Age Interval & Balance & Percent Uncollectible \\ \cline { 2 - 3 } Not past due & \(\$ 450,000\) & \(2 \%\) \\ 1-30 days past due & 110,000 & 4 \\ \(31-60\) days past due & 51,000 & 6 \\ \(61-90\) days past due & 12,500 & 20 \\ \(91-180\) days past due & 7,500 & 60 \\ Over 180 days past due & \(\frac{5,500}{\$ 636,500}\) & 80 \\ & \(\underline{\hline}\) \end{tabular} Estimate what the proper balance of the allowance for doubtful accounts should be as of December 31,2006 .
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