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Horngren'S Financial And Managerial Accounting
Found in: Page 475

Short Answer

Accounting for uncollectible accounts using the allowance (percent of-sales) and direct write-off methods and reporting receivables on the

balance sheet

On August 31, 2018, Bouquet Floral Supply had a $140,000 debit balance in AccountsReceivable and a $5,600 credit balance in Allowance for Bad Debts. During September,

Bouquet made:

• Sales on account, $550,000. Ignore Cost of Goods Sold.

• Collections on account, $584,000.

• Write-offs of uncollectible receivables, $4,000.

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 Bouquet used the direct write-off method toaccount 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 Bouquet report on its Septemberincome statement under each of the two methods? Which amount better matchesexpense with revenue? Give your reason.

4. What amount of net accounts receivable would Bouquet report on its September30, 2018, balance sheet under each of the two methods? Which amount is morerealistic? Give your reason.

  1. The amount of bad debt expense is $11,000.
  2. The amount of allowance of bad debts is $4,000.
  3. The allowance method is best matches the expenses.
  4. The allowance method amount is more realistic.
See the step by step solution

Step by Step Solution

Step 1: Definition of bad debts

Bad debt is the amount that is not received from the customers. The amount of the bad debt occurs when the company sold goods on credit to customers.

Step 2: Allowance method

Date

Particulars

Debit

Credit

September 30

Accounts Receivable

$550,000

Sales Revenue

$550,000

(To entry to record sale)

September 30

Cash

$584,000

Accounts Receivable

$584,000

(To entry to record the cash receipts)

September 30

Allowance for Bad Debts

$4,000

Accounts Receivable

$4,000

(To record allowance)

September 30

Bad Debt Expense

$11,000

Allowance for Bad Debts

$11,000

(To record bad debt expense)

Accounts Receivable

Details

Debit

Details

Credit

Balance September 1, 2018

$140,000

Cash

$584,000

Sales Revenue

$550,000

Allowance for bad debts

$4,000

Balance September 30, 2018

$102,000

Allowance for Bad Debts Account

Details

Debit

Details

Credit

Accounts Receivable

$4,000

Balance September 1, 2018

$5,600

Bad Debts Expense

$11,000

Balance September 30, 2018

$12,600

Bad Debt Expense

Details

Debit

Details

Credit

Allowance for Bad Debts

$11,000

Step 3: Direct write-off method

Date

Particulars

Debit

Credit

September 30

Accounts Receivable

$550,000

Sales Revenue

$550,000

(To record sale)

September 30

Cash

$584,000

Accounts Receivable

$584,000

(To record the cash receipts)

September 30

Bad Debts Expense

$4,000

Accounts Receivable

$4,000

(To record allowance)

Bad Debt Expense

Details

Debit

Details

Credit

Accounts Receivable

$4,000

Accounts Receivable

Details

Debit

Details

Credit

Balance September 1, 2018

$140,000

Cash

$584,000

Sales Revenue

$550,000

Bad Debt Expense

$4,000

Balance September 30, 2018

$24,000

Step 4: Income statement

Allowance Method:

Income Statement: $11,000

Direct Write-off Method:

Income Statement: $4,000

The allowance method best matches bad debt expenses with revenue because the allowance method bad debt expenses are estimated and recorded before the occurrence of bad debts. It records the bad debt expense in the same year of sale.

Step 5: Balance sheet

Amount of accounts receivable shown in the balance sheet:

Allowance method: $89,400

Balance sheet extract

as on 30 September 2018

ASSETS

CURRENT ASSETS

Accounts receivable

$1,02,000

Less: allowance for bad debts

($12,600)

$89,400

Direct write-off method: $24,000

The net allowance method is more correct because it shows the right amount of receivables.

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