Problem 7-19B: Determining Account Balances and Preparing Journal Entries: Percent of Revenue Allowance Method of Accounting for Uncollectible Accounts
The following information pertains to Kee Cabinet Company’s sales on account and accounts receivable:
- Accounts Receivable Balance, January 1, Year 2: $96,200
- Allowance for Doubtful Accounts, January 1, Year 2: $6,250
- Sales on Account, Year 2: $726,000
- Cost of Goods Sold, Year 2: $473,000
- Collections of Accounts Receivable, Year 2: $715,000
After several collection attempts, Kee Cabinet Company wrote off $3,100 of accounts that could not be collected. Kee estimates that uncollectible accounts expense will be 0.5 percent of sales on account.
Required:
a. Prepare the general journal entries to:
(1) Record sales on account for Year 2.
(2) Record cash collections from accounts receivable for Year 2.
(3) Write off the accounts that are not collectible.
(4) Record the estimated uncollectible accounts expense for Year 2.
b. Compute the following amounts:
(1) Using the allowance method, the amount of uncollectible accounts expense for Year 2.
(2) Net realizable value of receivables at the end of Year 2.
c. Explain why the uncollectible accounts expense amount is different from the amount that was written off as uncollectible.
Problem 7-20B: Accounting for Uncollectible Accounts: Percent of Receivables Allowance Method
Thorne Inc. experienced the following transactions for Year 1, its first year of operations:
- Issued common stock for $60,000 cash.
- Purchased $210,000 of merchandise on account.
- Sold merchandise that cost $165,000 for $310,000 on account.
- Collected $288,000 cash from accounts receivable.
- Paid $190,000 on accounts payable.
- Paid $46,000 of salaries expense for the year.
- Paid other operating expenses of $62,000.
- Thorne adjusted the accounts using the following information from an accounts receivable aging schedule:
| Number of Days Past Due | Amount | Percent Likely to be Uncollectible | Allowance Balance |
|---|---|---|---|
| Current | $5,700 | 0.01 | |
| 0–30 Days | $8,500 | 0.05 | |
| 31–60 Days | $4,000 | 0.10 | |
| 61–90 Days | $2,600 | 0.20 | |
| Over 90 Days | $1,200 | 0.50 |
Required:
a. Record the above transactions in general journal form and post them to T-accounts.
b. Prepare the income statement, statement of changes in stockholders’ equity, balance sheet, and statement of cash flows for Thorne Inc. for Year 1.
c. What is the net realizable value of the accounts receivable at December 31, Year 1?
Senior lecturer at University. 12+ years tutoring algebra and calculus..