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

Accounting for Receivables

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

Classic Auto Parts sells new and used auto 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, Classic Auto Parts experienced the following:

• Sales on account: $320,000
• Cash sales: $680,000
• Collections of accounts receivable: $295,000
• Uncollectible accounts charged off during the year: $1,400

Required

a. Assume that Classic Auto Parts 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 Classic Auto Parts 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 7-11B Accounting for notes receivable

Cachet Enterprises loaned $30,000 to Craft Co. on September 1, Year 1, for one year at 6 percent interest.

Required

a. Record these general journal entries for Cachet Enterprises:

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

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

Exercise 7-12B Notes receivable—accrued interest

On March 1, Year 1, Taylor’s Deli loaned $18,000 to Style Studio for one year at 5 percent interest.

Required

Answer the following questions:

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