Concept explainers
(a)
Credit Sales Method:
The method named percentage of credit sales method is the method in which the
Uncollectible accounts:
These are those accounts which reflect that amount of credit sales which is not to be collected i.e. bad debts.
To calculate:
The loss rate for each year from
Answer to Problem 83BPSB
The loss Rate over the period is:
Year of Sales | Loss Rate Percentage |
Explanation of Solution
The Kelly sells on credit. The data of past four years showing its credit sales and losses from uncollectible accounts are as follows:
Year of Sales | Credit Sales |
Losses from Uncollectible Accounts |
Total |
This is given in the question.
The loss rate from uncollectible accounts for the Kelly is as follows:
Year of Sales | Credit Sales |
Losses from Uncollectible Accounts |
Loss Rate Percentage |
Total |
(b)
Credit Sales Method:
The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.
Uncollectible accounts:
These are those accounts which reflect that amount of credit sales which is not to be collected i.e. bad debts.
To calculate:
The significant change in the loss rate.
Answer to Problem 83BPSB
The significant change is observed in the year
Explanation of Solution
The Kelly sells on credit. The data of past four years showing its credit sales and losses from uncollectible accounts are as follows:
Year of Sales | Credit Sales |
Losses from Uncollectible Accounts |
This is given in the question.
The changes in the loss rates over the period for the Kelly are as follows:
Year of Sales | Loss Rate Percentage | Increase or Decrease in the Loss Rate over the period | |
NOTE: The Base Year in this is taken to be |
(c)
Credit Sales Method:
The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.
Uncollectible accounts:
These are those accounts which reflect that amount of credit sales which is not to be collected i.e. bad debts.
To calculate:
The loss rate for estimating the bad debt for
Answer to Problem 83BPSB
The loss rate for estimating the bad debt in the year
Explanation of Solution
The Kelly sells on credit. The data of past four years showing its credit sales and losses from uncollectible accounts are as follows:
Year of Sales | Credit Sales |
Losses from Uncollectible Accounts |
This is given in the question.
The loss rate for estimating the bad debt in the year
Year | Credit Sales |
Losses from Uncollectible Accounts |
Loss Rate Percentage | Probability of Loss | Weighted Average of Loss |
Total |
(d)
Credit Sales Method:
The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.
Uncollectible accounts:
These are those accounts which reflect that amount of credit sales which is not to be collected i.e. bad debts.
To calculate:
The bad debt expense for
Answer to Problem 83BPSB
The bad debt expense for
Explanation of Solution
The Kelly sells on credit. The data of past four years showing its credit sales and losses from uncollectible accounts are as follows:
Year of Sales | Credit Sales |
Losses from Uncollectible Accounts |
This is given in the question.
The credit sales given in the question is
So, the bad debt expense to be recognised:
The journal entry for the Kelly is as follows:
Date | Particulars | Debit ($) | Credit ($) |
Bad debt expense……… Allowance for Doubtful accounts.………(Record the entry of bad debt expense) |
(e)
Credit Sales Method:
The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.
Uncollectible accounts:
These are those accounts which reflect that amount of credit sales which is not to be collected i.e. bad debts.
The reason for adopting more lenient credit terms by the Kelly and its effect on the bad debt expense.
Answer to Problem 83BPSB
The reasonable business reason for adopting the more lenient credit terms is that the business will increase their sales and revenue through this behaviour. The effect on bad debt will be that the bad debt will increase from this leniency.
Explanation of Solution
The leniency in the credit terms by the Kelly will increase the bad debt from
(f)
Credit Sales Method:
The method named percentage of credit sales method is the method in which the bad debts are computed on the basis of percentage of sales.
Uncollectible accounts:
These are those accounts which reflect that amount of credit sales which is not to be collected i.e. bad debts.
To calculate:
The increase in the operating income over those
Answer to Problem 83BPSB
The incremental in the operating income is
Explanation of Solution
The Kelly sells on credit. The data of past four years showing its credit sales and losses from uncollectible accounts are as follows:
Year of Sales | Credit Sales |
Losses from Uncollectible Accounts |
This is given in the question.
The increase in the income of the operations for the Kelly is as follows:
Credit Sales |
Gross Profit |
Losses from Uncollectible Accounts |
Increase in Operation Income |
||
Total |
Thus, the increase in the operation income is
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Chapter 5 Solutions
Cornerstones of Financial Accounting
- Bad Debt Expense: Percentage of Credit Sales Method The Glass House, a glass and china store, sells nearly half its merchandise on credit. During the past 4 years, the following data were developed for credit sales and losses from uncollectible accounts: Required: 1. Calculate the loss rate for each year from 2016 through 2018. ( Note: Round answers to three decimal places.) 2. Determine whether there appears to be a significant change in the loss rate over time. 3. CONCEPTUAL CONNECTION If credit sales for 2020 are $400,000, determine what loss rate you would recommend to estimate bad debts. ( Note: Round answers to three decimal places.) 4. Using the rate you recommend, record bad debt expense for 2020. 5. CONCEPTUAL CONNECTION Assume that the increase in The Glass Houses sales in 2020 was largely due to granting credit to customers who would have been denied credit in previous years. How would this change your answer to Requirement 4? Describe a legitimate business reason why The Glass House would adopt more lenient credit terms. 6. CONCEPTUAL CONNECTION Using the data from 2016 through 2019, estimate the increase in income from operations in total for those 4 years assuming (a) the average gross margin is 25% and (b) 50% of the sales would have been lost if no credit was granted.arrow_forwardMcKinney Co. estimates its uncollectible accounts as a percentage of credit sales. McKinney made credit sales of 1,500,000 in 2019. McKinney estimates 2.5% of its sales will be uncollectible. Prepare the journal entry to record bad debt expense for McKinney at the end of 2019.arrow_forwardAverage Uncollectible Account Losses and Bad Debt Expense The accountant for Porile Company prepared the following data for sales and losses from uncollectible accounts: Required: 1. Calculate the average percentage of losses from uncollectible accounts for 2015 through 2018. 2. Assume that the credit sales for 2019 are $1,260,000 and that the weighted average percentage calculated in Requirement 1 is used as an estimate of loses from uncollectible accounts for 2019 credit sales. Determine the bad debt expense for 2019 using the percentage of credit sales method. 3. CONCEPTUAL CONNECTION Do you believe this estimate of bad debt expense is reasonable? 4. CONCEPTUAL CONNECTION How would you estimate 2019 bad debt expense if losses from uncollectible accounts for 2018 were What other action would management consider?arrow_forward
- Allowance Method for Accounting for Bad Debts At the beginning of 2016, EZ Tech Companys Accounts Receivable balance was $140,000, and the balance in Allowance for Doubtful Accounts was $2,350 (Cr.). EZ Techs sales in 2016 were $1,050,000, 80% of which were on credit. Collections on account during the year were $670,000. The company wrote off $4,000 of uncollectible accounts during the year. Required Prepare summary journal entries related to the sale, collections, and write-offs of accounts receivable during 2016. Prepare journal entries to recognize bad debts assuming that (a) bad debts expense is 3% of credit sales and (b) amounts expected to be uncollectible are 6% of the year-end accounts receivable. What is the net realizable value of accounts receivable on December 31, 2016, under each assumption in part (2)? What effect does the recognition of bad debts expense have on the net realizable value? What effect does the write-off of accounts have on the net realizable value?arrow_forwardAllowance Method for Accounting for Bad Debts At the beginning of 2016, Miyazaki Companys Accounts Receivable balance was $105,000, and the balance in Allowance for Doubtful Accounts was $1,950. Miyazakis sales in 2016 were $787,500, 80% of which were on credit. Collections on account during the year were $502,500. The company wrote off $3,000 of uncollectible accounts during the year. Required Prepare summary journal entries related to the sales, collections, and write-offs of accounts receivable during 2016. Prepare journal entries to recognize bad debts assuming that (a) bad debts expense is 3% of credit sales and (b) amounts expected to be uncollectible are 6% of the year-end accounts receivable. What is the net realizable value of accounts receivable on December 31, 2016, under each assumption in part (2)? What effect does the recognition of bad debts expense have on the net realizable value? What effect does the write-off of accounts have on the net realizable value?arrow_forwardUNCOLLECTIBLE ACCOUNTS-PERCENTAGE OF SALES Nicoles Neckties has total credit sales for the year of 380,000 and estimates that 2% of its credit sales will be uncollectible. Record the end-of-period adjusting entry on December 31, in general journal form, for the estimated bad debt expense. Assume the following independent conditions existed prior to the adjustment: 1. Allowance for Doubtful Accounts has a credit balance of 430. 2. Allowance for Doubtful Accounts has a debit balance of 295.arrow_forward
- Funnel Direct recorded $1,345,780 in credit sales for the year and $695,455 in accounts receivable. The uncollectible percentage is 4.4% for the income statement method and 4% for the balance sheet method. A. Record the year-end adjusting entry for 2018 bad debt using the income statement method. B. Record the year-end adjusting entry for 2018 bad debt using the balance sheet method. C. Assume there was a previous credit balance in Allowance for Doubtful Accounts of $13,888; record the year-end entry for bad debt using the income statement method, and then the entry using the balance sheet method.arrow_forwardConner Pride reports year-end credit sales in the amount of $567,000 and accounts receivable of $134,000. Conner uses the balance sheet method to report bad debt estimation. The estimation percentage is 4.6%. What is the estimated balance uncollectible using the balance sheet method? A. $26,082 B. $6,164 C. $260,820 D. $61,640arrow_forwardAllowance Method of Accounting for Bad Debts—Comparison of the Two Approaches Kandel Company had the following data available for 2016 (before making any adjustments): Required Prepare the journal entry to recognize bad debts under the following assumptions: (a) bad debts expense is expected to be 2% of net credit sales for the year and (b) Kandel expects it will not be able to collect 6% of the balance in accounts receivable at year-end. Assume instead that the balance in the allowance account is a $2,600 debit. How will this affect your answers to part (1)?arrow_forward
- Michelle Company reports $345,000 in credit sales and $267,500 in accounts receivable at the end of 2019. Michelle currently uses the income statement method to record bad debt estimation at 4%. To manage earnings more efficiently, Michelle changes bed debt estimation to the balance sheet method at 4%. How much is the difference in net income between the income statement and balance sheet methods? A. $3,100 B. $13,800 C. $10,700 D. $77,500arrow_forwardPercentage of Credit Sales Method Ruby Red manufactures, markets, and distributes citrus flavored soft drinks across the globe. Ruby Red hired a collection agency in 2018 to increase collection rates from customers. As a result, Ruby estimates that only 2% of its 2019 credit sales will be written off, compared to the 4% of 2018s credit sales that were estimated to be uncollectible. At December 31, 2019, Ruby Red has a $12,800 credit balance in its allowance for doubtful accounts and credit sales of $1,570,000. Required: Use the percentage of credit sales method to calculate the bad debt expense.arrow_forwardClovis Enterprises reports $845,500 in credit sales for 2018 and $933,000 in 2019. It has a $758,000 accounts receivable balance at the end of 2018 and $841,000 at the end of 2019. Clovis uses the income statement method to record bad debt estimation at 4% during 2018. To manage earnings more favorably, Clovis changes bad debt estimation to the balance sheet method at 5% during 2019. A. Determine the bad debt estimation for 2018. B. Determine the bad debt estimation for 2019. C. Describe a benefit to Clovis Enterprises in 2019 as a result of its earnings management.arrow_forward
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