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Q43CP

Expert-verified
Horngren'S Financial And Managerial Accounting
Found in: Page 483

Short Answer

Accounting for uncollectible accounts using the allowance method

This problem continues the Canyon Canoe Company situation from Chapter 7.

Canyon Canoe Company has experienced rapid growth in its first few months of operations and has had a significant increase in customers renting canoes and purchasing T-shirts. Many of these customers are asking for credit terms. Amber and Zack Wilson, stockholders and company managers, have decided it is time to review their business transactions and update some of their business practices. Their first step is to make decisions about handling accounts receivable.

So far, year-to-date credit sales have been $15,500. A review of outstanding

receivables resulted in the following aging schedule:

Age of Accounts as of June 30, 2019

Customer name

1-30 days

31-60 days

61-90 days

Over 90 days

Total balance

Canyon

$250

$250

Crazy trees

$200

$150

$350

Early start Daycare

$500

Lakefront Pavilion

$575

$500

$575

Outdoor Center

$300

$300

Rivers Canoe Club

$350

$350

Sport Shirts

$450

$120

$570

Zack’s Marina

$75

$75

$225

Totals

$1,900

$345

$375

$500

$3,120

Requirements

1. The company wants to use the allowance method to estimate bad debts. Determine the estimated bad debts expense under the following methods at June 30, 2019. Assume a zero-beginning balance for Allowance for Bad Debts. Round to the nearest dollar.

a. Percent-of-sales method, assuming 4.5% of credit sales will not be collected.

b. Percent-of-receivables method, assuming 22.5% of receivables will not be

collected.

c. Aging-of-receivables method, assuming 5% of invoices 1–30 days will not be

collected, 20% of invoices 31–60 days, 40% of invoices 61–90 days, and 75% of

invoices over 90 days.

2. Journalize the entry at June 30, 2019, to adjust for bad debts expense using the percent-of-sales method.

3. Journalize the entry at June 30, 2019, to record the write-off of the Early Start Daycare invoice.

4. At June 30, 2019, open T-accounts for Accounts Receivable and Allowance for Bad Debts before Requirements 2 and 3. Post entries from Requirements 2 and 3 to those accounts. Assume a zero beginning balance for Allowance for Bad Debts.

5. Show how Canyon Canoe Company will report net accounts receivable on the balance sheet on June 30, 2019.

  1. Percentage of sales method: $697.5, Percentage of receivable method: $702, Aging method: $589.
  2. Allowance for bad debts: $697.5
  3. Allowance for bad debts: $375
  4. Balance in accounts receivable: $14,802.5 and $15,125 for requirement (2) and (3) respectively.
  5. Accounts receivable: $14,911.
See the step by step solution

Step by Step Solution

Step 1: Definition of Bad Debts

A business entity’s expenses for reporting the accounts receivables that are uncollectible are known as bad debt expenses. Such expenses are deducted from the receivables.

Step 2: Calculation of estimated bad debts

a. Percentage of sales method:

b. Percent of receivable method:

c. Aging of receivable method

Amount

Age

Estimated percentage of uncollectible

Uncollectible amounts

$1,900

1-30 days

5%

$95

$345

31-60 days

20%

$69

$375

61-90 days

40%

$150

$500

More than 90 days

75%

$375

Total

$589

Step 3: Journal entries

Date

Particulars

Debit

Credit

June 30, 2019

Allowance for bad debts

$697.5

Accounts receivable

$697.5

Step 4: Journal entry to write off early start Daycare invoice

Date

Particulars

Debit

Credit

June 30, 2019

Allowance for bad debts

$375

Accounts receivable

$375

Step 5: T-accounts

For requirement 2:

Accounts Receivable

Sales revenue

$15,500

$697.5

Allowance for bad debts

Balance c/d

$14,802.5

Allowance for bad debts

Accounts receivable

$697.5

Balance c/d

$697.5

For requirement 3:

Accounts Receivable

Sales revenue

$15,500

$375

Allowance for bad debts

Balance c/d

$15,125

Allowance for bad debts

Accounts receivable

$375

Balance c/d

$375

Step 6: Balance sheet

Canyon Canoe
Balance Sheet
As of June 30, 2019

Accounts Receivable

$15,500

Less- Allowance for bad debts

($589)

Net Accounts receivable

$14,911

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