7SE - Horngren'S Financial And Managerial Accounting

Question

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

The Accounts Receivable balance for Lake, Inc. at December 31, 2017, was \(20,000. During 2018, Lake earned revenue of \)454,000 on account and collected \(325,000 on account. Lake wrote off \)5,600 receivables as uncollectible. Industry experience suggests that uncollectible accounts will amount to 5% of accounts receivable.

 

Requirements

1. Assume Lake had an unadjusted \(2,700 credit balance in Allowance for Bad Debts at December 31, 2018. Journalize Lake’s December 31, 2018, adjustment to record bad debts expense using the percent-of-receivables method.

2. Assume Lake had an unadjusted \)2,400 debit balance in Allowance for Bad Debts at December 31, 2018. Journalize Lake’s December 31, 2018, adjustment to record bad debts expense using the percent-of-receivables method

Step-by-Step Solution

Answer

Percent-of-receivables: 

Percent-of-receivables method computes bad debts expense as a percentage of Ending balance of accounts receivable. 

Bad Debts expenses = Ending balance of accounts receivable* % (estimated) +/ - Unadjusted debit/credit balance of Allowance for Bad Debts

Ending balance of accounts receivable = $20,000+$ 454,000 - $ 325,000 - $ 5,600 

                                                                   = 1,43,400

Requirement 1: Journalize the transactions of Lake

Bad Debts expenses = $143,400* 5% - $2,700 

                                = $ 7,170 - $ 2,700

                                   = $ 4,470

Date	Account and explanation	Debit	Credit
2018
	Accounts receivable       Sales Revenue (Sold goods on account)	$ 454,000	$ 454,000
	Cash      Sales Revenue (Sold goods on account)	$ 325,000	$ 325,000
	Allowance for Bad Debts     Accounts Receivable (Wrote off an uncollectible account)	$ 5,600	$ 5,600
	Bad Debts     Allowance for Bad Debts  Recorded bad debts expense for the period.	$ 4,470	$ 4,470

Requirement 2: Journalize the transactions of Lake

Bad Debts expenses = $143,400* 5% + $2,400 

                                = $ 7,170 + $ 2,400

                                   = $ 9,570

Date	Account and explanation	Debit	Credit
2018
	Accounts receivable       Sales Revenue (Sold goods on account)	$ 454,000	$ 454,000
	Cash      Sales Revenue (Sold goods on account)	$ 325,000	$ 325,000
	Allowance for Bad Debts     Accounts Receivable (Wrote off an uncollectible account)	$ 5,600	$ 5,600
	Bad Debts     Allowance for Bad Debts  Recorded bad debts expense for the period.	$ 9,570	$ 9,570