Bassano Company prepares monthly financial statements and estimates its uncollectible accounts at the end of each month. Bassano Company has an October 31 fiscal year end, closes temporary accounts annually, and uses a perpetual inventory system.

On August 31, 2014, after completing its month-end adjustments, it had accounts receivable of $74,500, a credit balance of $1,480 in Allowance for Doubtful Accounts, and bad debt expense of $9,860. In September and October, the following occurred:

September

1. Sold $56,300 of merchandise on account; the cost of the merchandise was $25,335.

2. A total of $900 of the merchandise sold on account was returned. These customers were issued credit memos.

The cost of the merchandise was $400 and it was returned to inventory.

3. Collected $59,200 cash on account from customers.

4. Interest charges of $800 were charged to outstanding accounts receivable.

5. Recorded the monthly adjustment for bad debts. Uncollectible accounts were estimated to be 4% of accounts receivable.

October

1. Credit sales in the month were $66,300; the cost of the merchandise was $28,700.

2. Received $350 cash from a customer whose account had been written off in July.

3. Collected $58,500 cash, in addition to the cash collected in (2) above, from customers on account.

4. Wrote off $7,500 of accounts receivable as uncollectible.

5. Interest charges of $700 were charged to outstanding accounts receivable.

6. Recorded the year-end adjustment for bad debts. Uncollectible accounts were estimated to be 4% of accounts receivable.

Instructions

(a) For each of these transactions, indicate if the transaction has increased (+) or decreased (-) Cash, Accounts Receivable, Allowance for Doubtful Accounts, Inventory, Total Assets, and Owner's Equity and by how much. If the item is not changed, write NE to indicate there is no effect. Use the following format, in which the first one has been done for you as an example.

(b) Show how accounts receivable will appear on the October 31, 2014, balance sheet.
(c) What amount will be reported as bad debt expense on the income statement for the year ended October 31, 2014?
TAKING IT FURTHER
If Bassano's credit manager increases the amount of credit checking the company does before granting credit on all of its customers, will that eliminate the bad debts? Explain.

Transcribed Image Text:

Total Owner's Allowance for Transaction Cash Receivable Doubtful Accounts Inventory Assets Equity Accounts September: 1. NE +$56,300 NE $25,335 +$30,965 +$30,965