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During October, a company had sales of $180,000, which included $120,000 in credit sales. October collections were $90,000. Other data include

• September 30 debit balance in Accounts Receivable, $28,000.
• September 30 credit balance in Allowance for Uncollectible Accounts, $1,000.
• Uncollectible-account expense, estimated as 2% of credit sales.
• Write-offs of uncollectible receivables total $1,200.

1. Prepare journal entries to record sales, collections, uncollectible-account expense by the allowance method (percent-of-sales method), and write-offs of uncollectibles during October.

2. Show the ending balances in Accounts Receivable, Allowance for Uncollectible Accounts, and net accounts receivable at October 31. How much does the company expect to collect?

Balance Account Receivable: $56,800
Balance Allowance for Uncollectible Accounts: $2,200
Net Accounts Receivable: $54,600

On April 30, 20X7, First National Bank of Santa Fe, New Mexico, loaned $100,000 to Grant Thompson on a one-year, 9% note.

1. Compute the total interest for the years ended December 31, 20X7 and 20X8 for the Thompson note.

December 20X7 interest: $100,000 * 9% * (8/12) = $6,000
December 20X8 interest: $100,000 * 9% * (4/12) = $3,000

2. Which party has a

a. Note receivable?

First National Bank

b. Note payable?

Grant Thompson

c. Interest revenue?

First National Bank

d. Interest expense?

Grant Thompson

Record the following transactions in the journal of Spaceage Jewerly:

20X8

Feb. 12   Recorded VISA bankcard sales of $60,000, less a 2% discount.

May 1      Loaned $20,000 to Peter Liu on a one-year, 12% note.

Decf. 31  Accrued interest revenue on the Liu note.

20X9

May 1      Collected maturity value of the Liu note.

Navigation Systems sells on store credit and manages its own receivables. Average experience for the past three years has been as follows:

Total

Sales........................................$350,000

Cost of goods sold...................  210,000

Bad-debt expense....................     4,000

Other expenses........................    61,000

The owner is considering whether to accept bankcards (VISA, MasterCard). Typically, accepting bankcards increases total sales and cost of goods sold by 10%. But VISA and MasterCard charge approximately 2% of bankcard sales. If the owner switches to bankcards, he'll no longer have bad-debt expense. He can also save $5,000 on other expenses. After the switchover to bankcards, the owner expects cash sales of $200,000.

Should the owner start accepting bankcards? Show the computations of net income under his present arrangement and under the bankcard plan.

On May 31, Scuba Dive Equipment had a $210,000 debit balance in Accounts Receivable. During June, Scuba made sales of $560,000 all on credit. Other data for June include:

• Collections on account, $567,400.
• Write-offs of uncollectible receivables, $8,900.

1. Record sales and collections on account. Then record uncollectible-account expense and write-offs of customer accounts for June using the allowance method. Show all June activity in Accounts Receivable, Allowance for Uncollectible Accounts, and Uncollectible-Account Expense (post to these T-accounts). The May 31 unadjusted balance in Allowance for Uncollectible Accounts was $2,800 (credit). Uncollectible-account expense was estimated at 2% of credit sales.

2. Suppose Scuba Dive Equipment used a different method to account for uncollectible receivables. Record sales and collections on account. Then record uncollectible-account expense for June using the direct write-off method. Post to Accounts Receivable and Uncollectible-Account Expense and show their balances at June 30.

3. What amount of uncollectible-account expense would Scuba Dive Equipment report on its June income statement under each of the two methods? Which amount better matches expense with revenue? Give your reason.

Allowance method = $11,200

Direct Write-off method = $8,900

Allowance method better matches expense with revenue. The direct write off method always report receivables at their full amount. The write off does not occur in the same period as the revenue.

4. What amount of net accounts receivable would Scuba Dive Equipment report on its June 30 balance sheet under each of the two methods? Which amount is more realistic? Give your reason.

Allowance method = $191,400

Direct Write-off method = $193,700

Allowance method is more accurate because it doesn’t underestimate the uncollectible account expense and matches revenues with expenses in the same period.