Quiz 8: Receivables, Bad Debt Expense, and Interest Revenue

Business

(1) Prepare the journal entries for each of the transaction: img (2) Estimate the allowance for doubtful accounts required at December 31, 2014: img (3) Prepare the journal entry to account for the bad debt expenses: img (4) Calculate the accounts receivable turnover ratio: img img : img (5) Accounts receivable turnover ratio for the company is 12.0 times. It means accounts receivables are collected 12 times a year. This turnover ratio shows the efficiency to collect dollar amount on accounts receivables. In order to say that better managing accounts receivable turnover ratio should be more. However the company is better with the ratio comparing with the competitors.

(1) Complete the following aged listing of customer account at June 30, 2013: img (2) Estimate the allowance for doubtful accounts required at June 30, 2013: img (3) Show the reporting of accounts receivable on its June 30 balance sheet: img Bad debt expenses for June 30, 2013 should be $1,600 reported in the income statement for the 6 months period ended. (4) IOO Incorporation estimated allowance for doubtful accounts for $300 and $1,200 for TP and BP respectively. TP account should be write off for full amount of $1200 ($1500-$300) and BP account should be reversed as full amount collected for $3,000. There is no need to adjust for allowance for doubtful accounts as full recoverable of BP account offsets the complete write off of TP account.

Bad debts are the estimated amount of the current period's credit sales that customers will fail to pay. There are two methods of estimating bad debts. a) Percentage of credit sales method b) Aging of accounts receivable method 1. Percentage of credit sales method This method is also called the income statement approach. Under this method, bad debt expense for a period is recorded on the basis of historical percentage of credit sales that turn into bad debt losses. Compute the bad debt expense for the month by multiplying the credit sales of the month with the bad debt loss rate. img Therefore, img The accounting equation should be presented in the following manner. img img The journal entry to record the bad debt expense for the month should be prepared as follows img Working Note: a. The bad debt expense is increasing and when expenses increase the expense account should be debited. b. Allowance for doubtful accounts is a contra asset account. Whenever the balance of a contra asset account increase as a result of a transaction the account should be credited. 2. Aging of accounts receivable method Under the aging of accounts receivable method, the balance required to be set aside as allowance for Doubtful Accounts is estimated first. Then the unadjusted balance (if any) in the allowance for doubtful accounts are subtracted from the estimated amount to get the amount of bad debt expense for a period. Bad debt expense for the month should be computed as follows: img Therefore, img The accounting equation should be presented following manner. img img The journal entry to record the bad debt expense for the month should be prepared as follows img Working Note: a. The bad debt expense is increasing and when expenses increase the expense account should be debited. b. Allowance for doubtful accounts is a contra asset account. Whenever the balance of a contra asset account increase as a result of a transaction the account should be credited. 3. Company C's Allowance for Doubtful Accounts has a debit balance of $10,050. In order to determine the amount of adjustment, the required balance for the allowance for Doubtful Accounts ($1,007,000) will be added to its unadjusted balance $10,050. Therefore, the amount of adjustment would be $ 1,017,050 ($1,007,000 + $10,050). The accounting equation for the above adjustment should be represented in the following manner. img img The journal entry to record the bad debt expense for the month should be prepared as follows img Working Note: a. The bad debt expense is increasing and when expenses increase the expense account should be debited. b. Allowance for doubtful accounts is a contra asset account. Whenever the balance of a contra asset account increase as a result of a transaction the account should be credited. 4. Since the company maintains allowance for doubtful account, the write-off of a specific customer's balance will not affect its income statement. The estimated bad debt expense of $10,000 was already recorded with an adjusting entry in the period the sales were recorded. Therefore, no additional expense is incurred when the account is finally written off. The accounting equation for the above adjustment should be represented in the following manner. img img The journal entry to record the bad debt expense for the month should be prepared as follows img Working Note: a. The bad debt expense is increasing and when the balance of an expense account decreases the account should be credited. b. Allowance for doubtful accounts is a contra asset account. Whenever the balance of a contra asset account decrease as a result of a transaction the account should be credited.

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