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Chapter 8: Q20RQ (page 465)
What is the formula to compute interest on a note receivable?
Interest is computed by multiplying notes receivable value with interest rate and time period.
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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.
Journalizing note receivable transactions
The following selected transactions occurred during 2018 and 2019 for Baltic Importers. The company ends its accounting year on September 30.
2018 | |
Jul. 1 | Loaned \(16,000 cash to Bud Shyne on a one-year, 8% note. |
Sep. 6 | Sold goods to Lawn Pro, receiving a 90-day, 6% note for \)11,000. Ignore Cost of Goods Sold. |
30 | Made a single entry to accrue interest revenue on both notes. |
? | Collected the maturity value of the Lawn Pro note. |
2019 | |
Jul. 1 | Collected the maturity value of the Shyne note. |
Journalize all required entries. Make sure to determine the missing maturity date. Round to the nearest dollar
What are some limitations of using the direct write-off method?
Why must companies record accrued interest revenue at the end of the accounting period?
Weddings on Demand sells on account and manages its own receivables. My average
experience for the past three years has been as follows:
Sales \( 350,000
Cost of Goods Sold 210,000
Bad Debts Expense 4,000
Other Expenses 61,000
Unhappy with the amount of bad debts expense she has been experiencing, Aledia
Sanchez, controller, is considering a major change in the business. Her plan would be
to stop selling on account altogether but accept either cash, credit cards, or debit cards
from her customers. Her market research indicates that if she does so, her sales will
increase by 10% (i.e., from \)350,000 to \(385,000), of which \)200,000 will be credit
or debit card sales and the rest will be cash sales. With a 10% increase in sales, there
will also be a 10% increase in Cost of Goods Sold. If she adopts this plan, she will
no longer have bad debts expense, but she will have to pay a fee on debit/credit card
transactions of 2% of applicable sales. She also believes this plan will allow her to save
$5,000 per year in other operating expenses.
Should Sanchez start accepting credit cards and debit cards? Show the
computations of net income under her present arrangement and under the plan.
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