Question

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Problem 9-10A Eastern Supply uses the allowance method in accounting for uncollectible accounts the estimate based on the aging-of-accounts-receivable method. The company had following account balances on August 31, 2014: Accounts Receivable Allowance for Doubtful Accounts (credit balance) $687,000 72,600 The following transactions took place during September 2014: Sept. 2 Elbow Inc., which owes $48,000, is unable to pay on time and has given a 25-day, 8 percent note in settlement of the account. Received from Irma Good the amount owed on an August 7 dish note, plus extra interest for 30 days at 4% computed on the maturity value of the note ($12,600). This dishonoured note had been converted to an Account Receivable on August 7. Received notice that a customer (Tony Goad) has filed for bankruptcy. Goad owes $19,200. The courts will confirm the amount recoverable at a later date Determined the account receivable from Kay Walsh ($9,120) was uncollectible and wrote it off Received a cheque from the courts in the amount of $15,000 as final settlement of Goad's account. Elbow Inc. paid the note received on Septerdbr onoured 6 9 11 18 27 27 Determined the account receivable for Dave Compbell ($5,040) was uncollect 30 Sales for the month totalled $720,000 (of whish 85 percent were on account) 30 Eastern Supply did an aging of accounts receivable that indicated that $75 ible and wrote it off and collections on account totalled $601,200. ,000 is expected to be uncollectible. The company recorded the appropriate adjustment Required 1. Record the above transactions in the general journal. 2. What would be the adjusting entry required on September 30 if the company used the percent-of-sales method with an estimate of uncollectibles equal to 8 percent of credit n estimate of uncollectibles equal to 8 percent of credift sales? Which of the two methods of estimating uncollectible accounts would normally be accurate? Why? 3.

Answer 1

Formula sheet

Formula sheet

A	B	C	D	E	F	G	H	I	J	K	L
2
3		Journal entry for transactions will be as follows:
4		Date	Account	Debit	Credit
5		43345	Notes Receivables	48000
6			Accounts Receivables		=E5
7
8		43349	Cash	=F9+F10
9			Accounts Receivables		12600
10			Interest Income		=F9*4%*(1/12)
11
12		43352	Bad Debt Expense	19200
13			Allowance for doubtful accounts		=E12
14
15			Allowance for doubtful accounts	19200
16			Accounts Receivables		=E15
17
18		43354	Bad Debt Expense	9120
19			Allowance for doubtful accounts		=E18
20
21			Allowance for doubtful accounts	9120
22			Accounts Receivables		=E21
23
24		43361	Accounts Receivables	15000
25			Allowance for doubtful accounts		=E24
26
27			Cash	=E24
28			Accounts Receivables		=E27
29
30		43370	Cash	=F31+F32
31			Notes Receivable		48000
32			Interest Income ($48,000*8%*(25/365))		=F31*8%*(25/365)
33
34		43370	Bad Debt Expense	5040
35			Allowance for doubtful accounts		=E34
36
37			Allowance for doubtful accounts	5040
38			Accounts Receivables		=E37
39
40		43373	Accounts Receivables	=F42*85%
41			Cash	=F42-E40
42			Sales		720000
43
44			Cash	601200
45			Accounts Receivables		=E44
46
47		43373	Bad Debt Expense	75000
48			Allowance for doubtful accounts		=E47
49
50
51		2)
52
53		Credit Sales	=E40
54		% Uncollectible	0.08
55
56		Adjusting Entry will be as follows:
57		43373	Bad Debt Expense ($612,000*8%)	=D53*D54
58			Allowance for doubtful accounts		=E57
59
60		3)
61
62		Estimating the uncollectible accounts based on the aging of accounts receivables is more accurate because,
63		higher the aging of the account lesser it the chances of it being collected and hence higher % of the uncollectible amount with higher aging.
64		Also, we can specifically identify which account is more likely to default.
65
66		Whereas in the case of % of credit sales, it doesnot include the fact that which account is more likely to be uncollectible.
67
68		Thus Estimating the uncollectible accounts based on the aging of accounts receivables is more accurate.
69