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Horngren'S Financial And Managerial Accounting
Found in: Page 467

Short Answer

Applying the allowance method (percent-of-receivables) to account for Uncollectibles

The Accounts Receivable balance for Lake, Inc. at December 31, 2017, was $20,000. During 2018, Lake earned revenue of $454,000 on account and collected $325,000 on account. Lake wrote off $5,600 receivables as uncollectible. Industry experience suggests that uncollectible accounts will amount to 5% of accounts receivable.

Requirements

1. Assume Lake had an unadjusted $2,700 credit balance in Allowance for Bad Debts at December 31, 2018. Journalize Lake’s December 31, 2018, adjustment to record bad debts expense using the percent-of-receivables method.

2. Assume Lake had an unadjusted $2,400 debit balance in Allowance for Bad Debts at December 31, 2018. Journalize Lake’s December 31, 2018, adjustment to record bad debts expense using the percent-of-receivables method

Percent-of-receivables:

Percent-of-receivables method computes bad debts expense as a percentage of Ending balance of accounts receivable.

Bad Debts expenses = Ending balance of accounts receivable* % (estimated) +/ - Unadjusted debit/credit balance of Allowance for Bad Debts

Ending balance of accounts receivable = $20,000+$ 454,000 - $ 325,000 - $ 5,600

= 1,43,400

See the step by step solution

Step by Step Solution

Requirement 1: Journalize the transactions of Lake

Bad Debts expenses = $143,400* 5% - $2,700

= $ 7,170 - $ 2,700

= $ 4,470

Date

Account and explanation

Debit

Credit

2018

Accounts receivable

Sales Revenue

(Sold goods on account)

$ 454,000

$ 454,000

Cash

Sales Revenue

(Sold goods on account)

$ 325,000

$ 325,000

Allowance for Bad Debts

Accounts Receivable

(Wrote off an uncollectible account)

$ 5,600

$ 5,600

Bad Debts

Allowance for Bad Debts

Recorded bad debts expense for the period.

$ 4,470

$ 4,470

Requirement 2: Journalize the transactions of Lake

Bad Debts expenses = $143,400* 5% + $2,400

= $ 7,170 + $ 2,400

= $ 9,570

Date

Account and explanation

Debit

Credit

2018

Accounts receivable

Sales Revenue

(Sold goods on account)

$ 454,000

$ 454,000

Cash

Sales Revenue

(Sold goods on account)

$ 325,000

$ 325,000

Allowance for Bad Debts

Accounts Receivable

(Wrote off an uncollectible account)

$ 5,600

$ 5,600

Bad Debts

Allowance for Bad Debts

Recorded bad debts expense for the period.

$ 9,570

$ 9,570

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