Accounting for uncollectible accounts: percent of revenue allowance versus direct write-off method

Accounting for Receivables

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

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: $260,000

Cash sales: $580,000

Collections of accounts receivable: $235,000

Uncollectible accounts charged off during the year: $1,250

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

Exercise 7-11A Accounting for notes receivable

Rainey Enterprises loaned $20,000 to Small Co. on June 1, Year 1, for one year at 6 percent interest.

Required

a. Record these general journal entries for Rainey Enterprises:

1. The loan to Small Co.
2. The adjusting entry at December 31, Year 1.
3. The adjusting entry and collection of the note on June 1, Year 2.

b. Show the effects of the three above transactions in a horizontal statements model like the one shown next:

Exercise 7-12A Notes receivable—accrued interest

On May 1, Year 1, Benz’s Sandwich Shop loaned $10,000 to Mark Henry for one year at 6 percent interest.

Required

Answer the following questions:

a. What is Benz’s interest income for Year 1?
b. What is Benz’s total amount of receivables at December 31, Year 1?
c. How will the loan and interest be reported on Benz’s Year 1 statement of cash flows?
d. What is Benz’s interest income for Year 2?
e. What is the total amount of cash that Benz will collect in Year 2 from Mark Henry?
f. How will the loan and interest be reported on Benz’s Year 2 statement of cash flows?
g. What is the total amount of interest that Benz earned on the loan to Mark Henry?