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Chapter 8: Q15RQ (page 465)
When a receivable is written off under the allowance method, how does it affect the net realizable value shown on the balance sheet?
There will be no change in net realizable value.
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What is the expense account associated with the cost of uncollectible receivables called?
Accounting for uncollectible accounts using the allowance method (aging-of-receivables) and reporting receivables on the balance sheet.
At December 31, 2018, the Accounts Receivable balance of GPS Technology is \(200,000. The Allowance for Bad Debts account has a \)24,110 debit balance. GPS Technology prepares the following aging schedule for its accounts receivable:
| Age of Accounts | ||||
1–30 Days | 31–60 Days | 61–90 Days | Over 90 Days | |
Accounts Receivable | \( 65,000 | \) 50,000 | \(40,000 | \)45,000 |
Estimated percent uncollectible | 0.4% | 3.0% | 5.0% | 48.0% |
Requirement:
1. Journalize the year-end adjusting entry for bad debts on the basis of the aging schedule. Show the T-account for the Allowance for Bad Debts at December 31, 2018.
2. Show how GPS Technology will report its net accounts receivable on its December 31, 2018, balance sheet
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?
How does the percent-of-sales method compute bad debts expense?
Question: Silver Clothiers reported the following selected items at April 30, 2018 (last year’s—2017—amounts also given as needed):
Accounts Payable | \( 328,000 | Accounts Receivable, net: | |
Cash | \) 573,720 | April 30, 2018 | \( 11,000 |
Merchandise Inventory: | April 30, 2017 | \) 165,000 | |
April 30, 2018 | \( 250,000 | Cost of Goods Sold | \) 1,200,000 |
April 30, 2017 | \( 210,000 | Short-term Investments | \) 148,000 |
Net Credit Sales Revenue | \( 3,212,000 | Other Current Assets | \) 100,000 |
Long-term Assets | \( 350,000 | Other Current Liabilities | \) 188,000 |
Long-term Liabilities | $ 130,000 |
Compute Silver’s (a) acid-test ratio, (b) accounts receivable turnover ratio, and (c) days’ sales in receivables for the year ending April 30, 2018. Evaluate each ratio value as strong or weak. Silver sells on terms of net 30. (Round days’ sales in receivables to a whole number.)
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