Pebble Company began operations on November 1, Y1. Sales data for the first year

Question

Pebble Company began operations on November 1, Y1.   Sales data for the first years of operations were as follows:

Year

Total Credit Sales

Sales Returns & Allowances

Sales Discounts

Y1

$100,000

$1,000

$200

Y2

$1,000,000

$8,000

$600

Y3

$1,020,000

$9,000

$800

All sales to customers are made on account. Collections on the accounts receivable were:

Year

Cash Collections

Y1

$76,800

Y2

761,500

Y3

1,160,000

Some customers of Marcus Baides Company have not paid their bills on time, and the company decided to write off those accounts receivable balances. A schedule of write-offs follow:

Customer Name

Date of the write off

Amount of the write-off

Devin Brunet

3-15-Y2

$500

Will Carter

6-15-Y2

$2,100

Paige Daneau

10-02-Y2

$3,400

T. Douillette

12-30-Y2

$5,100

Rene Dubois

1-05-Y3

$4,000

Teri O’Brien

1-20-Y3

$4,500

Sofia Pantazis

5-15-Y3

$2,000

R. Ribeiro

11-20-Y3

$3,500

In some cases, after the receivable was written off, the customer subsequently paid some or all of the balance that was due. These subsequent payments are not included in the cash receipts noted above. The following schedule shows these payments of delinquent accounts:

Customer Name

Original A/R

Dollar Amount

Date A/R Written Off

Date

Reinstated

Amount

Customer

Pledged to Pay

Date Cash Collected

Amount of Cash Collected

Devin Brunet

$500

3-15-Y2

9-15-Y2

$500

9-15-Y2

$500

Rene Dubois

$4,000

1-05-Y3

4-15-Y3

$4,000

8-15-Y3

$1,700

Sofia Pantazis

$2,000

5-15-Y3

9-18-Y3

$2,000

9-18-Y3

$1,000

PART A: Assume Pebble Company uses the income statement approach of recording bad debt. Bad debt allowance percentages are:

Year

Bad Debt Percentage

Y1

2.0%

Y2

2.5%

Y3

2.4%

REQUIRED:

1.Prepare all journal entries necessary to record the accruals, write-offs, write-off reversals and cash collected on write-off reversals for years Y1, Y2, and Y3.

2.Using the “T” account tool, demonstrate the activity in the Allowance for Doubtful Accounts account for the one year period ending December 31, Y3.

3.Show the calculation of the Net Realizable Value of the receivables at December 31, Y3.

PART B: Assume Pebble Company uses the balance sheet approach to record the Allowance for Doubtful Accounts account. Data for Part B is as follows:

Year

Allowance %

Y1

8.0%

Y2

8.4%

Y3

8.6%

REQUIRED:

1.Prepare all journal entries necessary to record the accruals, write-offs, write-off reversals and cash collected on write-off reversals for years Y1, Y2, and Y3.

2.Using the “T” account tool, demonstrate the activity in the Allowance for Doubtful Accounts account for the one year period ending December 31, Y3.

3.Show the calculation of the Net Realizable Value of the receivables at December 31, Y3.

Year

Total Credit Sales

Sales Returns & Allowances

Sales Discounts

Y1

$100,000

$1,000

$200

Y2

$1,000,000

$8,000

$600

Y3

$1,020,000

$9,000

$800

Explanation / Answer

Part A: Year Total Credit Sales Sales Returns & Allowances Sales Discounts Net Sales   Cash Collections AR Balance before write off Wite off in the Year Reversal of write off Net AR Balance at Year end Bad debt % of net sales Bad debt Allowance Amt $ Balance Allowance a/c Y1 $100,000 $1,000 $200           98,800                76,800       22,000                   -                     -             22,000 2.0%      1,976              1,976 Y2 $1,000,000 $8,000 $600        991,400              761,500    251,900         11,100               500         241,300 2.5%    24,785            16,161 Y3 $1,020,000 $9,000 $800     1,010,200          1,160,000    102,100         14,000            2,700           90,800 2.4%    24,245            29,106 Accounting Entires Y1 Account Title Dr $ Cr $ Allowance for Uncollectible accounts         1,976 Bad Debt Expense                  1,976 Accounting Entires Y2 Allowance for Uncollectible accounts       24,785 Bad Debt Expense                24,785 ( allowance recording) Accounts Receivable         11,100 Allowance for Uncollectible accounts                11,100 ( write off Y2) Accounts Receivable                        500 Allowance for Uncollectible accounts             500 ( reversal of write off) Cash                      500 Accounts Receivable               500 ( cash collection from write off reversal) Accounting Entires Y3 Allowance for Uncollectible accounts       24,245 Bad Debt Expense                24,245 ( allowance recording) Accounts Receivable         14,000 Allowance for Uncollectible accounts                14,000 ( write off Y3) Accounts Receivable                    2,700 Allowance for Uncollectible accounts         2,700 ( reversal of write off) Cash                  2,700 Accounts Receivable           2,700 ( cash collection from write off reversal) T A/c balance allowance Y3 Details Amt $ Details Amt $ To AR write Off                              14,000 By Openingbalance                                    16,161 By reversal of write off                                    2,700 By Allowance provision Y3                                  24,245 Clsoing Balance                                    29,106 Net Realizable Value Y3 Accounts Receivable Balance                  90,800 Balance in Allowance for uncollectibel a/c              (29,106) Net Realizable Value Y3                61,694 Part B: Year Total Credit Sales Sales Returns & Allowances Sales Discounts Net Sales   Cash Collections AR Balance before write off Wite off in the Year Reversal of write off Net AR Balance at Year end Bad debt % of net sales Bad debt Allowance requirted   Bad debt Expense for the year   Y1 $100,000 $1,000 $200           98,800                76,800       22,000                   -                     -             22,000 8.0%      1,760              1,760 Y2 $1,000,000 $8,000 $600        991,400              761,500    251,900         11,100               500         241,300 8.4%    20,269            29,109 Y3 $1,020,000 $9,000 $800     1,010,200          1,160,000    102,100         14,000            2,700           90,800 8.6%      7,809          (10,000) Accounting Entires Y1 Account Title Dr $ Cr $ Allowance for Uncollectible accounts         1,760 Bad Debt Expense                  1,760 Accounting Entires Y2 Allowance for Uncollectible accounts       29,109 Bad Debt Expense                29,109 ( allowance recording) Accounts Receivable         11,100 Allowance for Uncollectible accounts                11,100 ( write off Y2) Accounts Receivable                        500 Allowance for Uncollectible accounts             500 ( reversal of write off) Cash                      500 Accounts Receivable               500 ( cash collection from write off reversal) Accounting Entires Y3 Allowance for Uncollectible accounts                10,000 Bad Debt Expense                         -         10,000 ( allowance recording) Accounts Receivable         14,000 Allowance for Uncollectible accounts                14,000 ( write off Y3) Accounts Receivable                    2,700 Allowance for Uncollectible accounts         2,700 ( reversal of write off) Cash                  2,700 Accounts Receivable           2,700 ( cash collection from write off reversal) T A/c balance allowance Y3 Details Amt $ Details Amt $ To AR write Off                              14,000 By Openingbalance                                    29,109 To Allowance provision                            10,000 By reversal of write off                                    2,700 By Allowance provision Y3 Clsoing Balance                                      7,809 Net Realizable Value Y3 Accounts Receivable Balance                  90,800 Balance in Allowance for uncollectibel a/c                (7,809) Net Realizable Value Y3                82,991

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