6SE - Horngren'S Financial And Managerial Accounting

Question

Applying the allowance method (percent-of-sales) to account for Uncollectibles

During its first year of operations, Fall Wine Tour earned net credit sales of \(311,000. Industry experience suggests that bad debts will amount to 3% of net credit sales. At December 31, 2018, accounts receivable total \)44,000. The company uses the allowance method to account for uncollectibles. 

 

Requirements

1. Journalize Fall Wine Tour’s Bad Debts Expense using the percent-of-sales method.

2. Show how to report accounts receivable on the balance sheet at December 31, 2018

Step-by-Step Solution

Answer

The percent-of-sales method computes bad debts expense as a percentage of net credit sales.

It’s a one of the method widely used to estimate the bad debts expenses. 

Bad Debts expenses = $311,000* 3% 

                                    = $ 9,330 

Requirement 1: Journalize the transactions of Fall Wine

Date	Account and explanation	Debit	Credit
2018
	Accounts receivable       Sales Revenue (Sold goods on account)	$ 311,000	$ 311,000
	Cash      Sales Revenue (Sold goods on account)	$ 267,000	$267,000
	Allowance for Bad Debts     Accounts Receivable (Wrote off an uncollectible account)	$ 9,330	$ 9,330

Requirement 2: report net accounts receivable on its December 31, 2018

Particular’s	As at December, 2018
Accounts Receivable Less: Allowance for Bad Debts	$ 44,000 $ (9,330)
Net Realizable Value	$34,670