Chapter 8: Q23RQ (page 465)
What does the accounts receivable turnover ratio measure, and how is it calculated?
The accounts receivable turnover ratio measures how usually the company can collect the amount of average accounts receivable in a year.
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Applying the direct write-off method to account for uncollectibles
Shawna Valley is an attorney in Los Angeles. Valley uses the direct write-off method to account for uncollectible receivables.
At April 30, 2018, Valley’s accounts receivable totaled \(19,000. During May, she earned revenue of \)22,000 on account and collected \(15,000 on account. She also wrote off uncollectible receivables of \)1,100 on May 31, 2018.
Requirements
1. Use the direct write-off method to journalize Valley’s write-off of the uncollectible receivables.
2. What is Valley’s balance of Accounts Receivable at May 31, 2018?
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.
Accounting for uncollectible accounts using the allowance method (aging-of-receivables) and reporting receivables on the balance sheet.
At December 31, 2018, the Accounts Receivable balance of GPS Technology is \(200,000. The Allowance for Bad Debts account has a \)24,110 debit balance. GPS Technology prepares the following aging schedule for its accounts receivable:
| Age of Accounts | ||||
1–30 Days | 31–60 Days | 61–90 Days | Over 90 Days | |
Accounts Receivable | \( 65,000 | \) 50,000 | \(40,000 | \)45,000 |
Estimated percent uncollectible | 0.4% | 3.0% | 5.0% | 48.0% |
Requirement:
1. Journalize the year-end adjusting entry for bad debts on the basis of the aging schedule. Show the T-account for the Allowance for Bad Debts at December 31, 2018.
2. Show how GPS Technology will report its net accounts receivable on its December 31, 2018, balance sheet
Defining common receivables terms
Match the terms with their correct definition.
Terms Definitions
1. Accounts receivable | a. The party to a credit transaction who takes on an obligation/payable. |
2. Other receivables | b. The party who receives a receivable and will collect cash in the future. |
3. Debtor | c. A written promise to pay a specified amount of money at a particular future date. |
4. Notes receivable | d. The date when the note receivable is due. |
5. Maturity date | e. A miscellaneous category that includes any other type of receivable where there is a right to receive cash in the future |
6. Creditor | f. The right to receive cash in the future from customers for goods sold or for services performed. |
Question: McKale Corporation has a three-month, $18,000, 9% note receivable from L. Peters that was signed on June 1, 2018. Peters defaults on the loan on September 1.
Journalize the entry for McKale to record the default of the loan
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