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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Collecting a receivable previously written off—direct write-off method
Spring Garden Greenhouse had trouble collecting its account receivable from Steve Stone. On June 19, 2018, Spring Garden Greenhouse finally wrote off Stone’s \(600 account receivable. On December 31, Stone sent a \)600 check to Spring Garden Greenhouse.
Journalize the entries required for Spring Garden Greenhouse, assuming Spring Garden Greenhouse uses the direct write-off method.
P8-38B Accounting for uncollectible accounts (aging-of-receivables method),
notes receivable, and accrued interest revenue
Relax Recliner Chairs completed the following selected transactions:
2018
Jul. 1 Sold merchandise inventory to Go-Mart, receiving a \(43,000, nine-month,
16% note. Ignore Cost of Goods Sold.
Oct. 31 Recorded cash sales for the period of \)23,000. Ignore Cost of Goods Sold.
Dec. 31 Made an adjusting entry to accrue interest on the Go-Mart note.
31 Made an adjusting entry to record bad debts expense based on an aging
of accounts receivable. The aging schedule shows that \(14,900 of accounts
receivable will not be collected. Prior to this adjustment, the credit balance
in Allowance for Bad Debts is \)10,700.
2019
Apr. 1 Collected the maturity value of the Go-Mart note.
Jun. 23 Sold merchandise inventory to Allure, Corp., receiving a 60-day, 6% note for
\(7,000. Ignore Cost of Goods Sold.
Aug. 22 Allure, Corp. dishonored its note at maturity; the business converted the
maturity value of the note to an account receivable.
Nov. 16 Loaned \)20,000 cash to Tench, Inc., receiving a 90-day, 8% note.
Dec. 5 Collected in full on account from Allure, Corp.
31 Accrued the interest on the Tench, Inc. note.
Record the transactions in the journal of Relax Recliner Chairs. Explanations are not
required. (Round to the nearest dollar.)
Evaluating ratio data
Silver Clothiers reported the following selected items at April 30, 2018 (last year’s—2017—amounts also given as needed):
Requirements
1. Calculate Abanaki’s acid-test ratio for 2018. (Round to two decimals.) Determine whether Abanaki’s acid-test ratio improved or deteriorated from 2017 to 2018. How does Abanaki’s acid-test ratio compare with the industry average of 0.80?
2. Calculate Abanaki’s accounts receivable turnover ratio. (Round to two decimals.) How does Abanaki’s ratio compare to the industry average accounts receivable turnover of 10?
3. Calculate the days’ sales in receivables for 2018. (Round to the nearest day.) How do the results compare with Abanaki’s credit terms of net 30?
Delta Watches completed the following selected transactions during 2018
and 2019:2018
Dec. 31 Estimated that bad debts expense for the year was 2% of credit sales of
\(450,000 and recorded that amount as expense. The company uses the
allowance method.
31 Made the closing entry for bad debts expense.
2019
Jan. 17 Sold merchandise inventory to Mack Smith, \)400, on account. Ignore Cost of
Goods Sold.
Jun. 29 Wrote off Mack Smith’s account as uncollectible after repeated efforts to
collect from him.
Aug. 6 Received \(400 from Mack Smith, along with a letter apologizing for being so
late. Reinstated Smith’s account in full and recorded the cash receipt.
Dec. 31 Made a compound entry to write off the following accounts as uncollectible:
Cam Carter, \)1,400; Mike Venture, \(1,200; and Russell Reeves, \)400.
31 Estimated that bad debts expense for the year was 2% on credit sales of
\(510,000 and recorded the expense.
31 Made the closing entry for bad debts expense.
Requirements
1. Open T-accounts for Allowance for Bad Debts and Bad Debts Expense, assuming
the accounts begin with a zero balance. Record the transactions in the general journal
(omit explanations), and post to the two T-accounts.
2. Assume the December 31, 2019, balance of Accounts Receivable is \)136,000.
Show how net accounts receivable would be reported on the balance sheet at
that date.
List some common examples of other receivables, besides accounts receivable and notes receivable.
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