Chapter 8: Q5RQ (page 465)
What type of account must the sum of all subsidiary accounts be equal to?
There must be a match between each subsidiary receivable and the overall balance in the control account, Accounts Receivable.
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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?
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. |
How is the acid-test ratio calculated, and what does it signify?
Dialex Watches completed the following selected transactions during 2018 and 2019:
2018
Dec. 31 Estimated that bad debts expense for the year was 3% of credit sales of
\(410,000 and recorded that amount as expense. The company uses the
allowance method.
31 Made the closing entry for bad debts expense.
2019
Jan. 17 Sold merchandise inventory to Marty White, \)400, on account. Ignore Cost of
Goods Sold.
Jun. 29 Wrote off Marty White’s account as uncollectible after repeated efforts to
collect from him.
Aug. 6 Received \(400 from Marty White, along with a letter apologizing for being
so late. Reinstated White’s account in full and recorded the cash receipt.
Dec. 31 Made a compound entry to write off the following accounts as uncollectible:
Barry Krisp, \)1,600; Maria Bryant, \(1,100; and Richard Renik, \)400.
31 Estimated that bad debts expense for the year was 3% on credit sales of
\(490,000 and recorded the expense.
31 Made the closing entry for bad debts expense.
Requirements
1.Open T-accounts for Allowance for Bad Debts and Bad Debts Expense, assuming
the accounts begin with a zero balance. Record the transactions in the general
journal (omit explanations), and post to the two T-accounts.
2.Assume the December 31, 2019, balance of Accounts Receivable is \)136,000. Show
how net accounts receivable would be reported on the balance sheet at that date.
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
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