Introduction to Financial Accounting |(11th Edition) Chapter 6, Problem 71P Book
ID: 2412084 • Letter: I
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Introduction to Financial Accounting |(11th Edition) Chapter 6, Problem 71P Bookmark Show all steps: O ON Problem Cottonwood Equipment Company had credit sales of $7 million during 20XO. Most customers paid promptly (within 30 days), but a few took longer; an average of 1.1% of credit sales were never paid. On December 31, 20X0, accounts receivable were $480,000. The Allowance for Bad Debts account, before any recognition of 20X0 bad debts, had a $1,200 debit balance. Cottonwood produces and sells mountaineering equipment and other outdoor gear. Most of the sales (about 80%) come in the period of March through August; the other 20% is spread almost evenly over the other 6 months. Over the last 6 years, an average of 17% of the December 31 balance in accounts receivable has not been collected. 1. Suppose Cottonwood Equipment uses the percentage of sales method to calculate an allowance for bad debts. Present the accounts receivable and allowance accounts as they should appear on the December 31, 20X0, balance sheet. Give the journal entry required to recognize the bad debt expense for 20X0. 2. Repeat requirement 1, except assume that Cottonwood Equipment uses the percentage of ending accounts receivable method. 3. Which method do you prefer? Why?Explanation / Answer
1.
When percentage of sales method is used, the balance of the allowance account is not considered. Hence the allowance for bad debts account will be credited with $77,000 (1.1% of $7 million).
The journal entry will be as follows:
2.
When the percentage of ending balance of accounts receivable is sued, we need to make adjustment to thebalance of the allowance for bad debts acounts, as the acount may have some adjustments which have been made during the year.
as per the balance of acounts receivable method the allowance should be $81,600 (17% of $480,000). Since there is a debit balance in th allowance account the entry that needs to be recorded will be for $82,600 so as to leave a credit balance of $81,600 in the allowance account which is required as per the percentage of receivables method.
The entry will be
3. I would prefer the percentage of receivables method, as this will be based on the actual receivables as on a day, and would be realisitc. The percetage of sales method, based in the sales will not reflect the true picture.
Dec.31,20X0 Bd Debts Expense 77000 Allowance for Bad Debts 77000 (Bad debts provided as at December 31,20X0)Related Questions
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