Chapter 8: Q15RQ (page 465)
When a receivable is written off under the allowance method, how does it affect the net realizable value shown on the balance sheet?
There will be no change in net realizable value.
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Accounting for uncollectible accounts using the allowance method
(aging-of-receivables) and reporting receivables on the balance sheet
At September 30, 2018, the accounts of Spring Mountain Medical Center (SMMC)
include the following:
During the last quarter of 2018, SMMC completed the following selected transactions:
• Sales on account, \(475,000. Ignore Cost of Goods Sold.
• Collections on account, \)451,800.
• Wrote off accounts receivable as uncollectible: Randall, Co., \(1,800; Oliver Welch,
\)900; and Rain, Inc., \(500
• Recorded bad debts expense based on the aging of accounts receivable, as follows:
Age of Accounts
1–30 Days 31–60
Days
61–90
Days
Over 90
Days
Accounts Receivable \) 97,000 \( 37,000 \) 17,000 $ 14,000
Estimated percent uncollectible 0.3% 3% 30% 35%
Requirements
1. Open T-accounts for Accounts Receivable and Allowance for Bad Debts.
Journalize the transactions (omit explanations) and post to the two accounts.
2. Show how Spring Mountain Medical Center should report net accounts receivable
on its December 31, 2018, balance sheet.
When using the allowance method, how are accounts receivable shown on the balance sheet?
Ensuring internal control over the collection of receivables Consider internal control over receivables collections. What job must be withheld from a company’s credit department in order to safeguard its cash? If the credit department does perform this job, what can a credit department employee do to hurt the company?
Applying the allowance method (aging-of-receivables) to account for Uncollectibles Surf and Sun had the following balances at December 31, 2018, before the year-end adjustments:
Accounts Receivable
81,000 |
Allowance for Bad Debts
Bal. \( 2,063 |
The aging of accounts receivable yields the following data:
Age of Accounts Receivable | |||
0–60 Days | Over 60 Days | Total Receivables | |
Accounts Receivable | \) 78,000 | \( 3,000 | \) 81,000 |
Estimated percent uncollectible | *2% | * 23% |
Requirements
1. Journalize Surf and Sun’s entry to record bad debts expense for 2018 using the aging-of-receivables method.
2. Prepare a T-account to compute the ending balance of Allowance for Bad Debts.
Question: Silver Clothiers reported the following selected items at April 30, 2018 (last year’s—2017—amounts also given as needed):
Accounts Payable | \( 328,000 | Accounts Receivable, net: | |
Cash | \) 573,720 | April 30, 2018 | \( 11,000 |
Merchandise Inventory: | April 30, 2017 | \) 165,000 | |
April 30, 2018 | \( 250,000 | Cost of Goods Sold | \) 1,200,000 |
April 30, 2017 | \( 210,000 | Short-term Investments | \) 148,000 |
Net Credit Sales Revenue | \( 3,212,000 | Other Current Assets | \) 100,000 |
Long-term Assets | \( 350,000 | Other Current Liabilities | \) 188,000 |
Long-term Liabilities | $ 130,000 |
Compute Silver’s (a) acid-test ratio, (b) accounts receivable turnover ratio, and (c) days’ sales in receivables for the year ending April 30, 2018. Evaluate each ratio value as strong or weak. Silver sells on terms of net 30. (Round days’ sales in receivables to a whole number.)
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