During 20X7, a Paint Store had credit sales of $700,000. The store manager expects that 2% of the credit sales will never be collected, although no accounts are written off until 10 assorted steps have been taken to attain collection. The 10 steps require a minimum of 14 months.
Assume that during 20X8; specific customers are identified who are never expected to pay $10,000 that they owe from the sales of 20X7. All 10 collection steps have been completed.
1. Show the impact on the balance sheet equation of the preceding transactions in 20X7 and 20X8 under:
a. the specific write-off method and
b. the allowance method.Which method do you prefer? Why?
2. Prepare journal entries for both methods.
An Electric company that serves customers in four provinces uses the allowance method for recognizing uncollectible accounts. The company's January 1, 2006 balance sheet showed accounts receivable of $17,377,963. The footnotes revealed that this was net of uncollectible accounts of $372,000.
1. Suppose the Company wrote off a specific uncollectible account for $10,000 on January 2, 2006. Assume that this was the only transaction affecting the accounts receivable or allowance accounts on that day. Give the journal entry to record this write-off. What would the balance sheet show for accounts receivable at the end of the day on January 2.
2. Suppose the Electric Company used the specific write-off method instead of the allowance method for recognizing uncollectible accounts. Compute the accounts receivable balance that would be shown on the January 1, 2006, balance sheet.
A Department Store has many accounts receivables. The Store's balance sheet, December 31, 20X1, showed Accounts Receivable, $950,000 and Allowance for Uncollectible Accounts, $40,000. In early 20X2, write-offs of customer accounts of $30,000 were made. In late 20X2, a customer, whose $5,000 debt has been written off earlier, won a lottery and decided to pay back his $5,000 debt to the Store immediately. The Store welcomed the customer's payment and returned his credit standing to high level.
Prepare the journal entries for the $30,000 write-off in early 20X2 and the $5,000 receipt in late 20X2.