Question

Babsox is a company that sells men's socks emblazoned with a picture of Mike Babcock, coach of the Toronto Maple Leafs. They sell to a variety of men's stores in the Ontario market. During 2017, the company had sales of $3,750,000. At the beginning of the year, the Company had $448,000 in Accounts Receivable and it collected $3,690,000 from its customers during the year. The Allowance for Doubtful Accounts was $33,250 at the beginning of the year and it wrote off $$39,250 during the year. An aging of the Accounts Receivable revealed that $304,600 was current; $70,300 was outstanding longer than 30 days; $56,200 was outstanding longer than 60 days; $28,100 was outstanding longer than 90 days; and, $9,550 was outstanding longer than 120 days. In evaluating the likelihood of collection its accounts, the company has determined that the categories of the Aged Trial Balance should be assessed as 2%; 5%; 10%; 30%, and, 75% probable to default. Required: a) Assuming that the Company uses the percentage of sales approach, with a 1% rate, prepare the entry to record the Bad Debt Expense for the year (use either Journal Entry format or T-Accounts); b) Assuming that the Company uses the Aged Trail Balance approach, prepare the entry to record the Bad Debt Expense for the year (use either Journal Entry format or T-Accounts); c) Briefly explain the merits of each approach to determining Bad Debt Expense

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ANS: Amount in $ to the Books of Babsox company (a) Journal entry to record the bad debt empense: Account Debit Bac debt expense ALL DE $37500 To Allowance for bad debt All $37500 (Being Bad debt empense recorredem) credit working : ody Toteur sales made by the Company & $ 3.750000 & Bad debt expense nate 1of sare Hence, Bad debt ($ 3.750000 X 241 : $37500 (6) journal entry to record the bad debt expense as per- aged treich barance approach & Accounts Debit credit Bad debt enpense Aic Ox $ 30,808 to Allowance for Bad debt ATC. $30, 808 (Beng Bad debt enpense reconden as per aged trical barance)

9557 468150 workings Current Account - Receivable: 304000 Doubtfur - Arouvance : 24 Bad debt : Gogo 30 days si bo days > 90 days > 120 days 7olaj 79300 5 6200 28/00 54 104 304 754 3515 5620 8430 7163 30808 (C) Both approaches have their own meruts, as follows & * Bad debt as pen of of sales approach & widely accepted approach anch has less complenity to determine bad-debt. & Bad debt as per Aged trial Balance approach. Its a very logical approach to determine bad debt. : Although it has some complemity in carceration but it is better than the previous approach in practically and - Logically:

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