Chapter 8: Q7RQ (page 465)
What occurs when a business factors its receivables?
It sells its receivables to a finance company or bank.
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What are some benefits to a business in accepting credit cards and debit cards?
Weddings on Demand sells on account and manages its own receivables. My average
experience for the past three years has been as follows:
Sales \( 350,000
Cost of Goods Sold 210,000
Bad Debts Expense 4,000
Other Expenses 61,000
Unhappy with the amount of bad debts expense she has been experiencing, Aledia
Sanchez, controller, is considering a major change in the business. Her plan would be
to stop selling on account altogether but accept either cash, credit cards, or debit cards
from her customers. Her market research indicates that if she does so, her sales will
increase by 10% (i.e., from \)350,000 to \(385,000), of which \)200,000 will be credit
or debit card sales and the rest will be cash sales. With a 10% increase in sales, there
will also be a 10% increase in Cost of Goods Sold. If she adopts this plan, she will
no longer have bad debts expense, but she will have to pay a fee on debit/credit card
transactions of 2% of applicable sales. She also believes this plan will allow her to save
$5,000 per year in other operating expenses.
Should Sanchez start accepting credit cards and debit cards? Show the
computations of net income under her present arrangement and under the plan.
Applying the allowance method (percent-of-sales) to account for Uncollectibles
During its first year of operations, Fall Wine Tour earned net credit sales of \(311,000. Industry experience suggests that bad debts will amount to 3% of net credit sales. At December 31, 2018, accounts receivable total \)44,000. The company uses the allowance method to account for uncollectibles.
Requirements
1. Journalize Fall Wine Tour’s Bad Debts Expense using the percent-of-sales method.
2. Show how to report accounts receivable on the balance sheet at December 31, 2018
Question: Endurance Running Shoes reports the following:
2018 | |
May 6 | Recorded credit sales of \(102,000. Ignore Cost of Goods Sold. |
Jul. 1 | Loaned \)18,000 to Jerry Paul, an executive with the company, on a one-year, 7% note |
Dec. 31 | Accrued interest revenue on the Paul note |
2019 | |
Jul. 1 | Collected the maturity value of the Paul note |
Journalize all entries required for Endurance Running Shoes.
During August 2018, Lima Company recorded the following:
• Sales of \(133,300 (\)122,000 on account; \(11,300 for cash). Ignore Cost of Goods Sold.
• Collections on account, \)106,400.
• Write-offs of uncollectible receivables, \(990.
• Recovery of receivable previously written off, \)800.
Requirement:
1. Journalize Lima’s transactions during August 2018, assuming Lima uses the direct write-off method.
2. Journalize Lima’s transactions during August 2018, assuming Lima uses the allowance method
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