Chapter 8: Q1RQ (page 465)
What is the difference between accounts receivable and notes receivable?
Answer
Notes receivables are long-term payments made under a contract over an extended period with interest. Accounts receivable is the amount of sales for which payment is due from the customer.
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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
How does the percent-of-sales method compute bad debts expense?
Professional Steam Cleaning performs services on account. When a customer account becomes four months old, Professional converts the account to a note receivable. During 2018, the company completed the following transactions:
2018 | |
Apr.28 | Performed service on account for Parkview Club, \(18,000. |
Sep. 1 | Received an \)18,000, 60-day, 12% note from Parkview Club in satisfaction of its past-due account receivable. |
Oct. 31 | Collected the Parkview Club note at maturity |
Record the transactions in Professional’s journal. Round to the nearest dollar.
Accounting for uncollectible accounts using the allowance (percent of-sales) and direct write-off methods and reporting receivables on thebalance sheet
On August 31, 2018, Forget-Me-Not Floral Supply had a \(140,000 debit balance inAccounts Receivable and a \)5,600 credit balance in Allowance for Bad Debts. DuringSeptember, Forget-Me-Not made the following transactions:
• Sales on account, \(530,000. Ignore Cost of Goods Sold.
• Collections on account, \)573,000.
• Write-offs of uncollectible receivables, $6,000.
Requirements
1. Journalize all September entries using the allowance method. 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 Forget-Me-Not used the direct write-off methodto account for uncollectible receivables. Journalize all September entries using thedirect write-off method. Post to Accounts Receivable and Bad Debts Expense, andshow their balances at September 30, 2018.
3. What amount of Bad Debts Expense would Forget-Me-Not report on its Septemberincome statement under each of the two methods? Which amount better
matches expense with revenue? Give your reason.
4. What amount of net accounts receivable would Forget-Me-Not report on its September
30, 2018, balance sheet under each of the two methods? Which amount ismore realistic? Give your reason
In accounting for bad debts, how do the income statement approach and the balance sheet approach differ?
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