Chapter 8: Q12RQ (page 465)
When is bad debts expense recorded when using the allowance method?
Answer
Under the allowance method, bad debt expenses are recorded at year-end while preparing the adjusting entries.
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What are some benefits to a business in accepting credit cards and debit cards?
At January 1, 2018, Hilltop Flagpoles had Accounts Receivable of \(28,000, and Allowance for Bad Debts had a credit balance of \)3,000. During the year, Hilltop Flagpoles recorded the following:
a. Sales of \(185,000 (\)164,000 on account; \(21,000 for cash). Ignore Cost of Goods Sold.
b. Collections on account, \)135,000.
c. Write-offs of uncollectible receivables, $2,300.
Requirements
1. Journalize Hilltop’s transactions that occurred during 2018. The company uses the allowance method.
2. Post Hilltop’s transactions to the Accounts Receivable and Allowance for Bad Debts T-accounts.
3. Journalize Hilltop’s adjustment to record bad debts expense assuming Hilltop estimates bad debts as 3% of credit sales. Post the adjustment to the appropriate T-accounts.
4. Show how Hilltop Flagpoles will report net accounts receivable on its December 31, 2018, balance sheet.
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.
How do the percent-of-receivables and aging-of-receivables methods compute bad debts expense?
Lovett Company reported the following selected items at March 31, 2018 (last year’s—2017—amounts also given as needed):
Accounts Payable \( 128,000 Accounts Receivable, net:
Cash 104,000 March 31, 2018 \) 108,000
Merchandise Inventory: March 31, 2017 68,000
March 31, 2018 116,000 Cost of Goods Sold 460,000
March 31, 2017 80,000 Short-term Investments 56,000
Net Credit Sales Revenue 1,168,000 Other Current Assets 48,000
Long-term Assets 168,000 Other Current Liabilities 72,000
Long-term Liabilities 52,000
14. Compute Lovett’s (a) acid-test ratio, (b) accounts receivable turnover ratio, and (c) days’ sales in receivables as of
March 31, 2018.
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