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Chapter 8: 6SE (page 467)

Applying the allowance method (percent-of-sales) to account for Uncollectibles

During its first year of operations, Fall Wine Tour earned net credit sales of \(311,000. Industry experience suggests that bad debts will amount to 3% of net credit sales. At December 31, 2018, accounts receivable total \)44,000. The company uses the allowance method to account for uncollectibles.

Requirements

1. Journalize Fall Wine Tour’s Bad Debts Expense using the percent-of-sales method.

2. Show how to report accounts receivable on the balance sheet at December 31, 2018

Short Answer

Expert verified

The percent-of-sales method computes bad debts expense as a percentage of net credit sales.

It’s a one of the method widely used to estimate the bad debts expenses.

Bad Debts expenses = $311,000* 3%

= $ 9,330

Step by step solution

01

Requirement 1: Journalize the transactions of Fall Wine

Date

Account and explanation

Debit

Credit

2018

Accounts receivable

Sales Revenue

(Sold goods on account)

$ 311,000

$ 311,000

Cash

Sales Revenue

(Sold goods on account)

$ 267,000

$267,000

Allowance for Bad Debts

Accounts Receivable

(Wrote off an uncollectible account)

$ 9,330

$ 9,330

02

Requirement 2: report net accounts receivable on its December 31, 2018

Particular’s

As at December, 2018

Accounts Receivable

Less: Allowance for Bad Debts

$ 44,000

$ (9,330)

Net Realizable Value

$34,670

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Most popular questions from this chapter

What is the expense account associated with the cost of uncollectible receivables called?

Sleepy Recliner Chairs completed the following selected transactions:

2018

Jul. 1 Sold merchandise inventory to Stan-Mart, receiving a \(41,000, nine-month, 8%

note. Ignore Cost of Goods Sold.

Oct. 31 Recorded cash sales for the period of \)24,000. Ignore Cost of Goods Sold.

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

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

of accounts receivable. The aging schedule shows that \(13,800 of accounts

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

Allowance for Bad Debts is \)11,800.

2019

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

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

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

Aug. 22 Appeal, Corp. dishonoured its note at maturity; the business converted the

maturity value of the note to an account receivable.

Nov. 16 Loaned \)17,000 cash to Crosby, Inc., receiving a 90-day, 16% note.

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

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

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

required. (Round to the nearest dollar.)

Applying the allowance method to account for uncollectibles

The Accounts Receivable balance and Allowance for Bad Debts for Signature Lamp

Company at December 31, 2017, was \(10,800 and \)2,000 (credit balance), respectively.

During 2018, Signature Lamp Company completed the following transactions:

a. Sales revenue on account, \(273,400 (ignore Cost of Goods Sold).

b. Collections on account, \)223,000.

c. Write-offs of uncollectibles, \(5,900.

d. Bad debts expense of \)5,200 was recorded

Requirements

1. Journalize Signature Lamp Company’s transactions for 2018 assuming Signature Lamp Company uses the allowance method.

2. Post the transactions to the Accounts Receivable, Allowance for Bad Debts, and Bad Debts Expense T-accounts, and determine the ending balance of each account.

3. Show how accounts receivable would be reported on the balance sheet at December 31, 2018.

Ensuring internal control over the collection of receivables Consider internal control over receivables collections. What job must be withheld from a company’s credit department in order to safeguard its cash? If the credit department does perform this job, what can a credit department employee do to hurt the company?

Suppose The Right Rig Dealership is opening a regional office in Omaha. Cary Regal, the office manager, is designing the internal control system. Regal proposes the following procedures for credit checks on new customers, sales on account, cash collections, and write-offs of uncollectible receivables:

• The credit department runs a credit check on all customers who apply for credit. When an account proves uncollectible, the credit department authorizes the write off of the accounts receivable.

• Cash receipts come into the credit department, which separates the cash received from the customer remittance slips. The credit department lists all cash receipts by customer name and amount of cash received.

• The cash goes to the treasurer for deposit in the bank. The remittance slips go to the accounting department for posting to customer accounts.

• The controller compares the daily deposit slip to the total amount posted to customer accounts. Both amounts must agree.

Recall the components of internal control. Identify the internal control weakness in this situation, and propose a way to correct it.
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