Toot Auto Supply distributes new and used automobile parts to local dealers throughout the Midwest. Toot’s credit terms are n/30. As of the end of business on October 31, the following accounts receivable were past due:
Account Due Date Amount Avalanche Auto August 8 $12,000 Bales Auto October 11 2,400 Derby Auto Repair June 23 3,900 Lucky’s Auto Repair September 2 6,600 Pit Stop Auto September 19 1,100 Reliable Auto Repair July 15 9,750 Trident Auto August 24 1,800 Valley Repair & Tow May 17 4,000
Determine the number of days each account is past due as of October 31.
Answer: Account Due Date Number of Days Past Due Avalanche Auto August 8 84 (23 + 30 + 31) Bales Auto October 11 20 (31 – 11) Derby Auto Repair June 23 130 (7 + 31 + 31 + 30 + 31) Lucky’s Auto Repair September 2 59 (28 + 31) Pit Stop Auto September 19 42 (11 + 31) Reliable Auto Repair July 15 108 (16 + 31 + 30 + 31) Trident Auto August 24 68 (7 + 30 + 31) Valley Repair & Tow May 17 167 (14 + 30 + 31 + 31 + 30 + 31)
The accounts receivable clerk for Thunderwood Industries prepared the following partially completed aging of receivables schedule as of the end of business on August 31:
Not Due Past 90 Over Customer Balance Days Past Due Allied Industries Inc. Archer Company Zussman Company Subtotals 3,000 4,500 5,000 750,000 7,000 5,000 75,000 3,000 480,000 4,500 160,000 28,000
The following accounts were unintentionally omitted from the aging schedule and not included in the subtotals above:
Customer Balance Due Date Color World Industries $33,000 March 13 Hawks Company 15,000 June 29 Osler Inc. 21,000 July 8 Sather Sales Company 8,000 September 6 Wisdom Company 6,500 August 25
a. Determine the number of days past due for each of the preceding accounts as of August 31. b. Complete the aging of receivables schedule by adding the omitted accounts to the bottom of the schedule and updating the totals.
Answer: a. Customer Due Date Number of Days Past Due Color World Industries March 13 171 days (18 + 30 + 31 + 30 + 31 + 31) Hawks Company June 29 63 days (1 + 31 + 31) Osler Inc. July 8 54 days (23 + 31) Sather Sales Company September 6 Not past due Wisdom Company August 25 6 days (31 – 25) b. Aging of Receivables Schedule August 31 Customer Balance Not Past Due Days Past Due 1–30 31–60 61–90 Over 90 Allied Industries Inc. 3,000 3,000 Archer Company 4,500 4,500 Zussman Company 5,000 5,000 Subtotals 750,000 480,000 160,000 75,000 28,000 7,000 Color World Industries 33,000 33,000 Hawks Company 15,000 15,000 Osler Inc. 21,000 21,000 Sather Sales Company 8,000 8,000 Wisdom Company 6,500 6,500 Totals 833,500 488,000 166,500 96,000 43,000 40,000 Thunderwood Industries has a past history of uncollectible accounts, as shown below. Estimate the allowance for doubtful accounts, based on the aging of receivables schedule you completed in Exercise 9-8.
Age Class Percent Uncollectible Not past due 2% 1–30 days past due 6 31–60 days past due 12 61–90 days past due 30 Over 90 days past due 75
Answer:
Balance Not Past Due Days Past Due 1–30 31–60 61–90 Over 90 Total receivables 833,500 488,000 166,500 96,000 43,000 40,000 Percentage uncollectible 2% 6% 12% 30% 75% Allowance for doubtful accounts 74,170 9,760 9,990 11,520 12,900 30,000
Traditional Bikes Co. is a wholesaler of motorcycle supplies. An aging of the company’s accounts receivable on December 31, 2014, and a historical analysis of the percentage of uncollectible accounts in each age category are as follows:
Age Interval Balance Percent Uncollectible Not past due $ 740,000 ½% 1–30 days past due 390,000 2 31–60 days past due 85,000 4 61–90 days past due 28,000 14 91–180 days past due 42,000 32 Over 180 days past due 15,000 80 $1,300,000
Estimate what the proper balance of the allowance for doubtful accounts should be as of December 31, 2014.
Answer:
Age Interval Balance Estimated Uncollectible Accounts Percent Amount Not past due $ 740,000 0.5% $ 3,700 1–30 days past due 390,000 2% 7,800 31–60 days past due 85,000 4% 3,400 61–90 days past due 28,000 14% 3,920 91–180 days past due 42,000 32% 13,440 Over 180 days past due 15,000 80% 12,000 Total $1,300,000 $44,260 Using the data in Exercise 9-11, assume that the allowance for doubtful accounts for Traditional Bikes Co. had a debit balance of $3,375 as of December 31, 2014. Journalize the adjusting entry for uncollectible accounts as of December 31, 2014.
Answer: 2014 Dec. 31 Bad Debt Expense 47,635 Allowance for Doubtful Accounts 47,635 Uncollectible accounts estimate ($44,260 + $3,375).
The following selected transactions were taken from the records of Shipway Company for the first year of its operations ending December 31, 2014:
Apr. 13. Wrote off account of Dean Sheppard, $8,450. May 15. Received $500 as partial payment on the $7,100 account of Dan Pyle. Wrote off the remaining balance as uncollectible. July 27. Received $8,450 from Dean Sheppard, whose account had been written off on April 13. Reinstated the account and recorded the cash receipt. Dec. 31. Wrote off the following accounts as uncollectible (record as one journal entry):
31. If necessary, record the year-end adjusting entry for uncollectible accounts.
a. Journalize the transactions for 2014 under the direct write-off method.
b. Journalize the transactions for 2014 under the allowance method. Shipway Company uses the percent of credit sales method of estimating uncollectible accounts expense. Based on past history and industry averages, ¾% of credit sales are expected to be uncollectible. Shipway Company recorded $3,778,000 of credit sales during 2014.
c. How much higher (lower) would Shipway Company’s net income have been under the direct write-off method than under the allowance method?
Answer:
a. Apr. 13 Bad Debt Expense 8,450 Accounts Receivable—Dean Sheppard 8,450 May 15 Cash 500 Bad Debt Expense 6,600 Accounts Receivable—Dan Pyle 7,100 July 27 Accounts Receivable—Dean Sheppard 8,450 Bad Debt Expense 8,450 27 Cash 8,450 Accounts Receivable—Dean Sheppard 8,450 Dec. 31 Bad Debt Expense 13,510 Accounts Receivable—Paul Chapman 2,225 Accounts Receivable—Duane DeRosa 3,550 Accounts Receivable—Teresa Galloway 4,770 Accounts Receivable—Ernie Klatt 1,275 Accounts Receivable—Marty Richey 1,690 31 No entry
b. Apr. 13 Allowance for Doubtful Accounts 8,450 Accounts Receivable—Dean Sheppard 8,450 May 15 Cash 500 Allowance for Doubtful Accounts 6,600 Accounts Receivable—Dan Pyle 7,100 July 27 Accounts Receivable—Dean Sheppard 8,450 Allowance for Doubtful Accounts 8,450 27 Cash 8,450 Accounts Receivable—Dean Sheppard 8,450 Dec. 31 Allowance for Doubtful Accounts 13,510 Accounts Receivable—Paul Chapman 2,225 Accounts Receivable—Duane DeRosa 3,550 Accounts Receivable—Teresa Galloway 4,770 Accounts Receivable—Ernie Klatt 1,275 Accounts Receivable—Marty Richey 1,690 31 Bad Debt Expense 28,335 Allowance for Doubtful Accounts 28,335 Uncollectible accounts estimate ($3,778,000 × 0.75% = $28,335). c. Bad debt expense under: Allowance method………………………...……………………………………… $28,335 Direct write-off method ($8,450 + $6,600 – $8,450 + $13,510)…………… 20,110 Difference ($28,335 – $20,110)………………………………………………… $ 8,225 Shipway Company’s income would be $8,225 higher under the direct write-off method than under the allowance method. During its first year of operations, Mack’s Plumbing Supply Co. had net sales of $3,250,000, wrote off $27,800 of accounts as uncollectible using the direct write-off method, and reported net income of $487,500. Determine what the net income would have been if the allowance method had been used, and the company estimated that 1% of net sales would be uncollectible.
The following selected transactions were taken from the records of Rustic Tables Company for the year ending December 31, 2014:
June 8. Wrote off account of Kathy Quantel, $8,440. Aug. 14. Received $3,000 as partial payment on the $12,500 account of Rosalie Oakes. Wrote off the remaining balance as uncollectible. Oct. 16. Received the $8,440 from Kathy Quantel, whose account had been written off on June 8. Reinstated the account and recorded the cash receipt. Dec. 31. Wrote off the following accounts as uncollectible (record as one journal entry):
Wade Dolan $4,600 Greg Gagne 3,600 Amber Kisko 7,150 Shannon Poole 2,975 Niki Spence 6,630
31. If necessary, record the year-end adjusting entry for uncollectible accounts.
a. Journalize the transactions for 2014 under the direct write-off method.
b. Journalize the transactions for 2014 under the allowance method, assuming that the allowance account had a beginning balance of $36,000 on January 1, 2014, and the company uses the analysis of receivables method. Rustic Tables Company prepared the following aging schedule for its accounts receivable:
Aging Class (Number of Days Past Due) Receivables Balance on December 31 Estimated Percent of Uncollectible Accounts 0–30 days $320,000 1% 31–60 days 110,000 3 61–90 days 24,000 10 91–120 days 18,000 33 More than 120 days 43,000 75 Total receivables $515,000
c. How much higher (lower) would Rustic Tables’ 2014 net income have been under the direct write-off method than under the allowance method?
Answer: a. June 8 Bad Debt Expense 8,440 Accounts Receivable—Kathy Quantel 8,440 Aug. 14 Cash 3,000 Bad Debt Expense 9,500 Accounts Receivable—Rosalie Oakes 12,500 Oct. 16 Accounts Receivable—Kathy Quantel 8,440 Bad Debt Expense 8,440 16 Cash 8,440 Accounts Receivable—Kathy Quantel 8,440 Dec. 31 Bad Debt Expense 24,955 Accounts Receivable—Wade Dolan 4,600 Accounts Receivable—Greg Gagne 3,600 Accounts Receivable—Amber Kisko 7,150 Accounts Receivable—Shannon Poole 2,975 Accounts Receivable—Niki Spence 6,630 31 No entry
b. June 8 Allowance for Doubtful Accounts 8,440 Accounts Receivable—Kathy Quantel 8,440 Aug. 14 Cash 3,000 Allowance for Doubtful Accounts 9,500 Accounts Receivable—Rosalie Oakes 12,500 Oct. 16 Accounts Receivable—Kathy Quantel 8,440 Allowance for Doubtful Accounts 8,440 16 Cash 8,440 Accounts Receivable—Kathy Quantel 8,440 Dec. 31 Allowance for Doubtful Accounts 24,955 Accounts Receivable—Wade Dolan 4,600 Accounts Receivable—Greg Gagne 3,600 Accounts Receivable—Amber Kisko 7,150 Accounts Receivable—Shannon Poole 2,975 Accounts Receivable—Niki Spence 6,630 31 Bad Debt Expense 45,545 Allowance for Doubtful Accounts 45,545 Uncollectible accounts estimate ($47,090 – $1,545). Computations: Aging Class (Number of Days Past Due) Receivables Balance on December 31 Estimated Doubtful Accounts Percent Amount 0–30 days $320,000 1% $ 3,200 31–60 days 110,000 3% 3,300 61–90 days 24,000 10% 2,400 91–120 days 18,000 33% 5,940 More than 120 days 43,000 75% 32,250 Total receivables $515,000 $47,090 Estimated balance of allowance account from aging schedule…………………… $47,090 Unadjusted credit balance of allowance account*…………………………………… 1,545 Adjustment………………………………………………………………………………… $45,545 * $36,000 – $8,440 – $9,500 + $8,440 – $24,955 = $1,545
c. Bad debt expense under: Allowance method………………………………………………………………… $45,545 Direct write-off method ($8,440 + $9,500 – $8,440 + $24,955)…………… 34,455 Difference………………………………………………………………………… $11,090 Rustic Tables’ income would be $11,090 higher under the direct write-off method than under the allowance method. Using the data in Exercise 9-15, assume that during the second year of operations Mack’s Plumbing Supply Co. had net sales of $4,100,000, wrote off $34,000 of accounts as uncollectible using the direct write-off method, and reported net income of $600,000.
a. Determine what net income would have been in the second year if the allowance method (using 1% of net sales) had been used in both the first and second years.
b. Determine what the balance of the allowance for doubtful accounts would have been at the end of the second year if the allowance method had been used in both the first and second years.
Answer: a. $593,000 [$600,000 + $34,000 – ($4,100,000 × 1%)] b. $11,700 ($32,500 – $27,800) + ($41,000 – $34,000)
