Chapter 8: Q8RQ (page 465)
What occurs when a business pledges its receivables?
Answer
The business entity sells the receivable to the finance company under pledge.
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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
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.
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.
When using the allowance method, what account is debited when writing off uncollectible accounts? How does this differ from the direct write-off method?
When using the allowance method, how are accounts receivable shown on the balance sheet?
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