Question

Mellisa Corp. had the following events during its final three months of the fiscal year ending on May 31, 2015.

(a) March 28:     Sold $1,600 of merchandise to Matthew Inc. on account.

(b) March 29:     Matthew Inc. returned $300 of the merchandise purchased on March 28.

(c) April 3:     Sold $ 4,800 of merchandise to Kenzi Inc.

(d) April 6:   Matthew Inc. paid off all his purchase (including those made in the past).

(e) April 14: Wrote-off an old account for $ 3,000 which is related to sales made prior to March 1, 2015.

(f) April 25: Molly Ltd. purchased $12,000 of merchandise, paid half in cash

(g) May 30:    Mellisa Corp. recovered $ 1,000 from the receivables that were written off on April 14.

Additional information:

• Credit terms: 2/10, n/30
• Matthew Inc. has a balance of $1,000 outstanding as of March 1, 2015, from purchases made on January 10, 2015.
• Mellisa Corp. records show the following account balances as of March 1, 2015:

Accounts Receivables ……………………………………… $ 17,000

Allowance for Doubtful Accounts (credit balance)…….             1,000

Net Credit Sales………………………………………....          191,000

Cash Sales …………………………………….…………        100,000

Required:

1. Prepare the journal entries to record the above transactions.

2. Mellisa Corp. uses the Aging of Accounts Receivables method to determine the amount of receivables that may not be collected in the future according to the following schedule:

Estimated Uncollectible Rate

Not yet Due………………………………….…… 5%

1-30 days past due……………………………….. 10%

31-60 days past due……………………………… 15%

More than 60 days overdue……………………… 20%

Determine the amount of receivables that may not be collected in the future, and prepare the journal entry to record the bad debt expenses on May 31, 2015. Show all your calculations.

3. Suppose Thompson uses the Percentage of Credit Sales method to estimate bad debts, using a bad debt rate of 1%. Would Mellisa Corp. incur a higher or lower bad debt expense for the fiscal year ending on May 31, 2015? Show your calculations.

Answer 1

1. Journal Entries:

28-Mar	Accounts receivable (Mathew Inc) Dr	1600
	To Sales		1600
29-Mar	Sales returns a/c Dr	300
	To Accounts Receivable (Mathew Inc)		300
3-Apr	Accounts receivable (Kenzi Inc) Dr	4800
	To Sales		4800
6-Apr	Cash a/c Dr (1000 + (1600-300)*98%)	2274
	To Accounts Receivable (Mathew Inc)		2274
14-Apr	Allowance for doubtful a/c Dr	3000
	To Accounts Receivable a/c		3000
25-Apr	Accounts Receivable (Molly Ltd) a/c Dr	6000
	Cash a/c Dr	6000
	To Sales a/c		12000
30-Apr	Accounts Receivable a/c Dr	1000
	To Allowance for bad debts a/c		1000
	Cash a/c Dr	1000
	To Accounts Receivable a/c		1000

2. Ageing analysis:

More than 60d days	ie Balance as on 1/3: 17000 - 1000 (Mathew) =16000	20%	3200
31-60	Kenzi Inc 4800 (59 days) + Molly ltd 6000 (37 days) =10800	15%	1620
11-31			0
0-10			0
	Total Allowance		4820

Allowance for doubtful a/c Dr

To Accounts Receivable a/c	3000	By Balance c/d	1000
		By Accounts Receivable	1000
To balance c/d	4820	By Bad debt expense a/c (bal fig)	5820
	7820		7820

So, Journal entry is:

• Bad debt expense a/c Dr 5820
• To Allowance for doubtful accounts 5820.

3. Total credit sales => 191000+1600-300+6000+4800 = 203100. So, % of Sales => 1%*203100 = 2031. So

Allowance for doubtful a/c Dr

To Accounts Receivable a/c	3000	By Balance c/d	1000
		By Accounts Receivable	1000
To balance c/d	2031	By Bad debt expense a/c (bal fig)	3031
	5031		5031

Hence Melissa inc will incrr lower bad debt expense if % of sales method is used.