eHod adjustment had not been made in (2). Ignore income taxes. 2-30 The Redford
ID: 2472322 • Letter: E
Question
eHod adjustment had not been made in (2). Ignore income taxes. 2-30 The Redford Optical Supplies Corporation uses the percentage of sales method for estimating its bad debts expense. In 2014 the corporation sold on redit $350,000 of glasses and lenses and had sales returns and allowances from credit sales of $20,000. In past years, approximately I percent of net credit sales have been uncollectible. At the end of Redford's fiscal year, before the bad debts expense end-of-period adjustment is made, the accounts receivable balance was $75,000 and the allowance for bad debts balance was $500. Required: () Compute the dollar amount of bad debts expense that Redford should include on its 2014 income statement. (2) Prepare the bad debts end-of-period adjustment. (3) Show how the net accounts receivable would be reported on Redford's balance sheet at the end of 2014 (4) Discuss the effect on Redford's 2014 financial statements if the end-of- period adjustment had not been made in (2). Ignore income taxes 2-31 Use the same facts for Redford Optical Supplies Corporation in 12-30, but assume Red- ford uses the aging method for calculating bad debts expense and the allowance for bad debts. In using the aging method, Redford has found that 2 percent of accounts receiv- able that are not yet past due at the end of any particular year are never collected and 5 percent of accounts receivable that are overdue at year-end are never collected. Of the accounts receivable balance at the end of 2014, 40% are not yet past due Required: (I) Compute the dollar amount of bad debts expense that Redford should Required: () Compute the dollar amount of bad debts expense that include on its 2014 income statement. (2) Show how the net accounts receivable would be reported on Redford's balance sheet at the end of 2014Explanation / Answer
1.
Account receivable balance = $75,000
Account receivable not yet past due = 40% * $75,000 = $30,000
Allowance for bad debts for accounts receivable not yet past due = 2% * $30,000 = $600
Account receivable overdue = 60% * $75,000 = $45,000
Allowance for account receivable overdue = $45,000 * 5% = $2,250
Total bad debt expense = $600 + $2,250 = $2,850
2.
Account receivables
$75,000
Less: Allowance for doubtful accounts ($500 + $2,850)
$3,350
Account receivables (net)
$71,650
Account receivables
$75,000
Less: Allowance for doubtful accounts ($500 + $2,850)
$3,350
Account receivables (net)
$71,650
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