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Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
ISBN: 9781337119207

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BuyFindarrow_forward

Financial & Managerial Accounting

14th Edition
Carl Warren + 2 others
ISBN: 9781337119207
Textbook Problem

Entries for uncollectible receivables, using allowance method

Journalize the following transactions in the accounts of Zippy Interiors Company, a restaurant supply company that uses the allowance method of accounting for uncollectible receivables:

May 24 Sold merchandise on account to Old Town Cafe $18,450. The cost of goods sold was $11,000.
Sept. 30 Received $6,000 from Old Town Cafe and wrote off the remainder owed on the sale of May 24 as uncollectible.
Dec. 7 Reinstated the account of Old Town Cafe that had been written off on September 30 and received $12,450 cash in full payment.

To determine

Accounts receivable

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Bad debt expense:

Bad debt expense is an expense account. The amounts of loss incurred from extending credit to the customers are recorded as bad debt expense. In other words, the estimated uncollectible accounts receivable are known as bad debt expense.

Allowance method:

It is a method for accounting bad debt expense, where amount of uncollectible accounts receivables are estimated and recorded at the end of particular period. Under this method, bad debts expenses are estimated and recorded prior to the occurrence of actual bad debt, in compliance with matching principle by using the allowance for doubtful account.

To journalize: The transaction for the Company Z.

Explanation

1.

Prepare the journal entry to record the sale of merchandise on account, and the cost of goods sold.

Date Particulars Debit Credit
May 24 Accounts receivable – O T Cafe $18,450  
     Sales   $18,450
  (To record sale of merchandise on account)    
 
May 24 Cost of merchandise sold $11,000  
     Merchandise inventory   $11,000
  (To record the cost of goods sold)    

Table (1)

Sale on account increases accounts receivable and sales revenue account. Hence, an increase in accounts receivable (asset account) is debited with $18,450 and an increase in sales revenue (stockholders’ equity account) is credited with $18,450.

Cost of goods sold is $11,000. Thus the expense incurred must be recognized by increasing cost of goods sold account and the merchandise inventory which is sold out should be decreased to record the inventory which is sold out. Hence, an increase in Cost of goods sold (expense account) is debited with $11,000 and a decrease in Merchandise inventory (asset account) is credited with $11,000.

2.

Prepare the journal entry to record the collection of cash and write-off of uncollectible accounts, under direct write-off method.

Date Particulars Debit Credit
September 30 Cash $6,000  
Allowance for doubtful accounts $12,450  
       Account receivable – O T Cafe   $18,450
  (To record cash collection and write-off of uncollectible account receivable )    

Table (2)

To record the collection of cash on account, cash account must be increased and accounts receivable must be decreased by $6,000.

To record this write-off of uncollectible receivables of $12,450 ($18,450$6,000)   under allowance method, both allowance for doubtful accounts and accounts receivable must be decreased by $12,450

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