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Chapter 8: Q28PGA (page 475)

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

balance sheet

On August 31, 2018, Bouquet Floral Supply had a \(140,000 debit balance in AccountsReceivable and a \)5,600 credit balance in Allowance for Bad Debts. During September,

Bouquet made:

• Sales on account, \(550,000. Ignore Cost of Goods Sold.

• Collections on account, \)584,000.

• Write-offs of uncollectible receivables, $4,000.

Requirements

1. Journalize all September entries using the allowancemethod. 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 Bouquet used the direct write-off method toaccount for uncollectible receivables. Journalize all September entries using thedirect write-offmethod. Post to Accounts Receivable and Bad Debts Expense, andshow their balances at September 30, 2018.

3. What amount of Bad Debts Expense would Bouquet report on its Septemberincome statement under each of the two methods? Which amount better matchesexpense with revenue? Give your reason.

4. What amount of netaccounts receivable would Bouquet report on its September30, 2018, balance sheet under each of the two methods? Which amount is morerealistic? Give your reason.

Short Answer

Expert verified
  1. The amount of bad debt expense is $11,000.
  2. The amount of allowance of bad debts is $4,000.
  3. The allowance method is best matches the expenses.
  4. The allowance method amount is more realistic.

Step by step solution

01

Definition of bad debts

Bad debt is the amount that is not received from the customers. The amount of the bad debt occurs when the company sold goods on credit to customers.

02

Allowance method

Date

Particulars

Debit

Credit

September 30

Accounts Receivable

$550,000

Sales Revenue

$550,000

(To entry to record sale)

September 30

Cash

$584,000

Accounts Receivable

$584,000

(To entry to record the cash receipts)

September 30

Allowance for Bad Debts

$4,000

Accounts Receivable

$4,000

(To record allowance)

September 30

Bad Debt Expense

$11,000

Allowance for Bad Debts

$11,000

(To record bad debt expense)

Accounts Receivable

Details

Debit

Details

Credit

Balance September 1, 2018

$140,000

Cash

$584,000

Sales Revenue

$550,000

Allowance for bad debts

$4,000

Balance September 30, 2018

$102,000

Allowance for Bad Debts Account

Details

Debit

Details

Credit

Accounts Receivable

$4,000

Balance September 1, 2018

$5,600

Bad Debts Expense

$11,000

Balance September 30, 2018

$12,600

Bad Debt Expense

Details

Debit

Details

Credit

Allowance for Bad Debts

$11,000

03

Direct write-off method

Date

Particulars

Debit

Credit

September 30

Accounts Receivable

$550,000

Sales Revenue

$550,000

(To record sale)

September 30

Cash

$584,000

Accounts Receivable

$584,000

(To record the cash receipts)

September 30

Bad Debts Expense

$4,000

Accounts Receivable

$4,000

(To record allowance)

Bad Debt Expense

Details

Debit

Details

Credit

Accounts Receivable

$4,000

Accounts Receivable

Details

Debit

Details

Credit

Balance September 1, 2018

$140,000

Cash

$584,000

Sales Revenue

$550,000

Bad Debt Expense

$4,000

Balance September 30, 2018

$24,000

04

Income statement

Allowance Method:

Income Statement: $11,000

Direct Write-off Method:

Income Statement: $4,000

The allowance method best matches bad debt expenses with revenue because the allowance method bad debt expenses are estimated and recorded before the occurrence of bad debts. It records the bad debt expense in the same year of sale.

05

Balance sheet

Amount of accounts receivable shown in the balance sheet:

Allowance method: $89,400

Balance sheet extract

as on 30 September 2018

ASSETS

CURRENT ASSETS

Accounts receivable

$1,02,000

Less: allowance for bad debts

($12,600)

$89,400

Direct write-off method: $24,000

The net allowance method is more correct because it shows the right amount of receivables.

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Most popular questions from this chapter

Recording credit sales and collections

Record the following transactions for Summer Consulting. Explanations are not required.

Apr. 15

Provided consulting services to Bob Jones and billed the customer \(1,500.

18

Provided consulting services to Samantha Cruise and billed the customer \)865.

25

Received \(750 cash from Jones.

28

Provided consulting services to Regan Taylor and billed the customer \)625.

28

Received \(865 cash from Cruise.

30

Received \)1,375 cash, \(750 from Jones and \)625 from Taylor

What type of account must the sum of all subsidiary accounts be equal to?

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.

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.

Consider the following transactions for TLC Company.

2018

Dec. 6 Received a \(8,000, 90-day, 9% note in settlement of an overdue accounts

receivable from Forest Music.

31 Made an adjusting entry to accrue interest on the Forest Music note.

31 Made a closing entry for interest revenue.

2019

Mar. 6 Collected the maturity value of the Forest Music note.

Jun. 30 Loaned \)14,000 cash to Washington Music, receiving a six-month, 12% note.

Oct. 2 Received a $1,000, 60-day, 12% note for a sale to ZZZ Music. Ignore Cost of

Goods Sold.

Dec. 1 ZZZ Music dishonored its note at maturity.

1 Wrote off the receivable associated with ZZZ Music. (Use the allowance

method.)

30 Collected the maturity value of the Washington Music note
See all solutions

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