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Chapter 8: 16RQ (page 465)

How does the percent-of-sales method compute bad debts expense?

Short Answer

Expert verified

The formula used for the calculation of bad debt under the percent-of-sales method:

Baddebtexpenses=Netcreditsales×estimatedpercentageofbaddebts

Step by step solution

01

Step 1: Definition of Bad Debt Expenses

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 bad debts expenses using the percent of sales method

The business entity determines the bad debt expenses by taking the product of the net credit sales and the estimated percentage of bad debts. The estimated percentage depends upon the historical data on bad debts.

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Most popular questions from this chapter

Why must companies record accrued interest revenue at the end of the accounting period?

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.

Accounting for uncollectible accounts using the allowance (percent of-sales) and direct write-off methods and reporting receivables on thebalance sheet

On August 31, 2018, Forget-Me-Not Floral Supply had a \(140,000 debit balance inAccounts Receivable and a \)5,600 credit balance in Allowance for Bad Debts. DuringSeptember, Forget-Me-Not made the following transactions:

• Sales on account, \(530,000. Ignore Cost of Goods Sold.

• Collections on account, \)573,000.

• Write-offs of uncollectible receivables, $6,000.

Requirements

1. Journalize all September entries using the allowance method. Bad debts expense wasestimated at 2% of credit sales. Show all September activity in Accounts Receivable,Allowance for Bad Debts, and Bad Debts Expense (post to these T-accounts).

2. Using the same facts, assume that Forget-Me-Not used the direct write-off methodto account for uncollectible receivables. Journalize all September entries using thedirect write-off method. Post to Accounts Receivable and Bad Debts Expense, andshow their balances at September 30, 2018.

3. What amount of Bad Debts Expense would Forget-Me-Not report on its Septemberincome statement under each of the two methods? Which amount better

matches expense with revenue? Give your reason.

4. What amount of net accounts receivable would Forget-Me-Not report on its September

30, 2018, balance sheet under each of the two methods? Which amount ismore realistic? Give your reason

When a receivable is written off under the allowance method, how does it affect the net realizable value shown on the balance sheet?

This problem continues the Crystal Clear Cleaning problem begun in Chapter 2 and

continued through Chapter 7.

Crystal Clear Cleaning uses the allowance method to estimate bad debts. Consider the following April 2019 transactions for Crystal Clear Cleaning:

Apr. 1 Performed cleaning service for Debbie’s D-list for \(13,000 on account with

terms n/20.

10 Borrowed money from First Regional Bank, \)30,000, making a 180-day, 12% note.

12 After discussions with customer More Shine, Crystal Clear has determined that

\(230 of the receivable owed will not be collected. Wrote off this portion of the

receivable.

15 Sold goods to Warner for \)9,000 on account with terms n/30. Cost of Goods Sold

was \(4,500.

28 Sold goods to Lelaine, Inc. for cash of \)2,800 (cost \(840).

28 Collected from More Shine, \)230 of receivable previously written off.

29 Paid cash for utilities of \(150.

30 Created an aging schedule for Crystal Clear Cleaning for accounts receivable.

Crystal Clear determined that \)7,000 of receivables outstanding for 1–30 days

were 3% uncollectible, \(10,000 of receivables outstanding for 31–60 days were

20% uncollectible, and \)5,870 of receivables outstanding for more than 60 days

were 30% uncollectible. Crystal Clear Cleaning determined the total amount of

estimated uncollectible receivables and adjusted the Allowance for Bad Debts.

Assume the account had an unadjusted credit balance of $260. (Round to

nearest whole dollar.)

Requirements

1. Prepare all required journal entries for Crystal Clear. Omit explanations.

2. Show how net accounts receivable would be reported on the balance sheet as of

April 30, 2019.
See all solutions

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