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Chapter 8: Q20E (page 471)

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

Short Answer

Expert verified
  1. Journal entry and T account is recorded in Step 2.
  2. The net realizable value is $174,640.

Step by step solution

01

Definition of bad-debt expense

The bad debt expense refers to the outstanding amount from the customers end, which remains uncollectible.

02

Journalizing of bad-debt expense and preparation of T-Account

Bad-Debt  Expense=Target  Balance+Unadjusted Balance=(($65,000×0.4%)+($50,000×3%)+($40,000×5%)+($45,000×48%))+$24,110=($260+$1,500+$2,000+$21,600)+$24,110=$25,360+$24,110=$49,470

Date

Particulars

Debit

Credit

Bad Debts

$49,470

Allowance for Bad Debts

$49,470

(Being entry to record bad debts expense)


Allowance for Bad Debts

Balance

$24,110

$49,470

Adjustments

$25,360

Ending Balance

03

Calculation of net realizable value

GPS Technology

Partial Balance Sheet

As of December, 2018

Accounts Receivable

$200,000

Less: Allowance for Bad Debts

($25,360)

Net Realizable Value

$174,640

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Most popular questions from this chapter

Consider the following transactions for CC Publishing.

2018

Dec. 6 Received a \(18,000, 90-day, 6% note in settlement of an overdue accountsreceivable from Go Go Publishing.

31 Made an adjusting entry to accrue interest on the Go Go Publishing note.

31 Made a closing entry for interest revenue.

2019

Mar. 6 Collected the maturity value of the Go Go Publishing note.

Jun. 30 Loaned \)11,000 cash to Lincoln Music, receiving a six-month, 20% note.

Oct. 2 Received a $2,400, 60-day, 20% note for a sale to Tusk Music. Ignore Cost ofGoods Sold.

Dec. 1 Tusk Music dishonored its note at maturity.

1 Wrote off the receivable associated with Tusk Music. (Use the allowance method.)

30 Collected the maturity value of the Lincoln Music note.

Journalize all transactions for CC Publishing. Round all amounts to the nearest dollar.

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.

On August 1, Taylor Company lent $80,000 to L. King on a 90-day, 5% note.

12. Journalize for Taylor Company the lending of the money on August 1.

13. Journalize the collection of the principal and interest at maturity. Specify the date. Round interest to the nearest dollar.

What are some limitations of using the direct write-off method?

Accounting for notes receivable and accruing interestCarley Realty loaned money and received the following notes during 2018.Note Date Principal Amount Interest Rate Term

(1) Apr. 1 $ 6,000 7% 1 year

(2) Sep. 30 12,000 6% 6 months

(3) Sep. 19 18,000 8% 90 days

Requirements

1. Determine the maturity date and maturity value of each note.

2. Journalize the entries to establish each Note Receivable and to record the collection ofprincipal and interest at maturity. Include a single adjusting entry on December 31, 2018, the fiscal year-end, to record accrued interest revenue on any applicable note.Explanations are not required. Round to the nearest dollar.
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