Crystal Lights Company manufactures and sells light fixtures for homes, businesses, and institutions. All of its sales are made on credit to wholesale distributors. Information for Crystal Lights for the current year follows:
Total credit sales ..................................$3,500,000
Accounts receivable at December 31 (after writing off uncollectible accounts) ... 450,000
Required:
Assume that Crystal Lights estimates its bad debts based on an aging analysis of its year-end accounts receivable, which indicates that a provision for uncollectible accounts of $34,000 is required.
a. If there is a debit balance of $6,000 in its Allowance for Doubtful Accounts on December 31, before adjustment:
i. What amount will the company report on its statement of income as bad debts expense?
ii. What amount will it report on its statement of financial position as the net value of its accounts receivable?
b. If there is a $6,000 credit balance in the Allowance for Doubtful Accounts on December 31, before adjustment:
i. What amount will the company report on its statement of income as bad debts expense?
ii. What amount will it report on its statement of financial position as the net value of its accounts receivable?
Assume that Crystal Lights decides to estimate its bad debts expense at 1% of credit sales.
c. If there is a debit balance of $6,000 in its Allowance for Doubtful Accounts on December 31, before adjustment:
i. What amount will the company report on its statement of income as bad debts expense?
ii. What amount will it report on its statement of financial position as the net value of its accounts receivable?
d. If there is a $6,000 credit balance in the Allowance for Doubtful Accounts on December 31, before adjustment:
i. What amount will the company report on its statement of income as bad debts expense?
ii. What amount will it report on its statement of financial position as the net value of its accounts receivable?
Assume that Crystal Lights uses the direct writeoff method of accounting for bad debts and that the company wrote off accounts totalling $17,500 as uncollectible during the year.
e. What amount will the company report on its statement of income as bad debts expense?
f. What amount will it report on its statement of financial position as the net value of its accounts receivable?
Recall the discussion in the chapter on the allowance method.
g. Briefly outline the main advantages of the allowance method of accounting for bad debts.