ACC 311 Lecture Notes - Lecture 9: Petty Cash, Accounts Receivable, Internal Control
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12. Raintree Cosmetic Company sells its products to customers ona credit basis. An adjusting entry for bad debt expense is recordedonly at December 31, the companyâs fiscal year-end. The 2015balance sheet disclosed the following: |
Current assets: | |||||
Receivables, net of allowance for uncollectibleaccounts of $39,000 $477,000 | |||||
During 2016, credit sales were $1,795,000,cash collections from customers $1,875,000, and $44,000 in accountsreceivable were written off. In addition, $3,900 was collected froma customer whose account was written off in 2015. An aging ofaccounts receivable at December 31, 2016, reveals thefollowing: |
Percentage of Year-End | Percent | ||||
Age Group | Receivables in Group | Uncollectible | |||
0â60 days | 70 | % | 5% | ||
61â90 days | 20 | 15 | |||
91â120 days | 5 | 20 | |||
Over 120 days | 5 | 40 | |||
Required: |
2. | Prepare the year-endadjusting entry for bad debts according to each of the followingsituations: |
a. | Bad debt expense isestimated to be 4% of credit sales for the year. |
b. | Bad debt expense is estimated by computing net realizable valueof the receivables. The allowance for uncollectible accounts isestimated to be 10% of the year-end balance in accountsreceivable. |
c. | Bad debt expense is estimated by computing net realizable valueof the receivables. The allowance for uncollectible accounts isdetermined by an aging of accounts receivable. |
(If no entry is required for a transaction/event, select"No journal entry required" in the first accountfield.) | |
3. | For situations (a)â(c) in requirement 2 above, what would be thenet amount of accounts receivable reported in the 2016 balancesheet? |
Learning Objective 4: Apply GAAP to uncollectible receivables at December 31, 2016, before any year-end adjustments, the Accounts Receivable balance of Haley Travel, Inc., is $400,000. The Allowance for Doubtful Accounts has a $19,600 credit balance. Haley Travel prepares the following aging schedule for Accounts Receivable:
Age of Accounts
Total Balance 1-30 Days 31-60 Days 61-90 Days Over 90 Days
$400,000 $180,000 $120,000 $80,000 $20,000
Estimated uncollectible 0.5% 5.0% 11.0% 50.0%
Requirements:
1. Based on the aging of Accounts Receivable, is the unadjusted balance of the allowance account adequate? Too high? Too low?
2. Make the entry required by the aging schedule. Prepare a T-account for the allowance.
3. Show how Haley Travel will report Accounts Receivable on its December 31 balance sheet
Solution: | |||||||
Req. 1 | |||||||
1-30 | 31-60 | 61-90 | Over 90 | Total | |||
days | days | days | days | balance | |||
Est. % uncollectible | x .005 | x .05 | x .11 | x .50 | |||
Bal. in Allow. for Doubtful Accounts should be | |||||||
$ 0 | $ 0 | $ 0 | $ 0 | $ - | |||
Current balance | |||||||
Amount needed in adj. entry | |||||||
Req. 2 | |||||||
Journal | |||||||
DATE | ACCOUNT TITLES AND EXPLANATION | DEBIT | CREDIT | ||||
Dec. 31 | |||||||
- | |||||||
Allowance for Doubtful Accounts | |||||||
Bal. | |||||||
Req. 3 | |||||||
BALANCE SHEET | |||||||
Current assets: | |||||||
Cash | $ XX | ||||||
Short-term investments | XX | ||||||
Accounts receivable, net of allowance | |||||||
for doubtful accounts of $ | * | ||||||
Or | |||||||
*Another way to report accounts receivable is | |||||||
Accounts receivable | |||||||
Less: Allowance for doubtful accounts | |||||||