Question

Exercise 7-10A Accounting for uncollectible accounts: percent of revenue allowance versus direct write-off method LO 7-1, 7-4

Joey’s Bike Shop sells new and used bicycle parts. Although a majority of its sales are cash sales, it makes a significant amount of credit sales. During Year 1, its first year of operations, Joey’s Bike Shop experienced the following:

Sales on account	$	270,400
Cash sales		660,200
Collections of accounts receivable		256,880
Uncollectible accounts charged off during the year		1,292

Required:
a. Assume that Joey’s Bike Shop uses the allowance method of accounting for uncollectible accounts and estimates that 1 percent of its sales on account will not be collected. Answer the following questions:

1. (1) What is the Accounts Receivable balance at December 31, Year 1?
2. (2) What is the ending balance of the Allowance for Doubtful Accounts at December 31, Year 1, after all entries and adjusting entries are posted?
3. (3) What is the amount of uncollectible accounts expense for Year 1?
4. (4) What is the net realizable value of accounts receivable at December 31, Year 1?

  

b. Assume that Joey’s Bike Shop uses the direct write-off method of accounting for uncollectible accounts. Answer the following questions:

1. (1) What is the Accounts Receivable balance at December 31, Year 1?
2. (2) What is the amount of uncollectible accounts expense for Year 1?
3. (3) What is the net realizable value of accounts receivable at December 31, Year 1?

Answer 1

a)
1)	Accounts receivable balance = 270400-256880-1292 =	$       12,228
2)	Provision required for doubtful accounts = 270400*1% =	$          2,704
	Less: Amount written off	$          1,292
	Ending balance in allowance for bad debts	$          1,412
3)	Uncollectible expense for the year	$          2,704
4)	Net realizable value of accounts receivable = 12228-1412 =	$       10,816
b)
1)	Accounts receivable balance = 270400-256880-1292 =	$ 12,228.00
2)	Uncollectible expense for the year	$    1,292.00
3)	Net realizable value of accounts receivable	$ 12,228.00