On August 31st, Pro Tennis Equipment had $150,000 debit balance in Accounts Rece

Question

On August 31st, Pro Tennis Equipment had $150,000 debit balance in Accounts Receivable. During September, Pro-Tennis Equipment had the following transactions: Sales; of $500,000 all on credit Collections on account,$550,000 Write-offs of uncollectible receivables, $7,000

i). Assume that Pro-Tennis Equipment uses the allowance method to account for uncollectible accounts and that there was a $9,000 credit balance in the allowance account on August 31. Prepare journal entries to record sale, collections, on account, and write-offs of uncollectible accounts for the month of September. Next, assuming that uncollectible accounts expense is estimated 2% of credit sales, prepare the adjusting journal entry to record bad debts expenses. Enter the beginning balances and post all September entries in T-accounts for Accounts Receivable, Allowance for Uncollectible Accounts, and Uncollectible Accounts Expense.

ii) Suppose that instead of the allowance method, Pro Tennis Equipment uses the direct write-off method to account for uncollectible receivables. Prepare journal entries to record the sales. collections on account, and write-offs of uncollectible accounts for the month of September. Enter the beginning balances and post all September activity in T-Accounts for accounts Receivable and Uncollectible Accounts Expense.

iii) What amount of uncollectible accounts expense would Pro-Tennis Equipment report on its September income statement under each of the two methods? Which amount better matches expenses with revenue? Give your reason.

iv) What amount of net accounts receivable would Pro Tennis Equipment report on its September 30 balance sheet under each of the two methods? Which amount is more realistic? Give your reason.

Explanation / Answer

1. Journal

T-accounts:

Accounts Receivable

Allowance for uncollectible accounts

Uncollectible account expense

2. Journal

Accounts Receivable

Uncollectible account expense

3. Amount of uncollectible accounts expense to be reported on income statement under method I = $8000

Amount of uncollectible accounts expense to be reported on income statement under method II = $7000

Amount under method I better matches with revenue, since it accounts for creation of 2% of reserve for uncollectible accounts.

4. Amount of net accounts receivable to be reported on balance sheet under method I = $93000

Amount of net accounts receivable to be reported on balance sheet under method II = $93000

Date Particulars Dr. Cr. 1. Allowance for uncollectible accounts 7000 Accounts Receivables 7000 2. Accounts Receivable 500000 Sales 500000 3. Cash 550000 Accounts Receivables 550000 4. Uncollectible account expense [500000x2% - 2000] 8000 Allowance for uncollectible accounts 8000

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