On December 31 of last year, the balance sheet of Union Company had accounts receivable of $74,500

Question:

On December 31 of last year, the balance sheet of Union Company had accounts receivable of $74,500 and a credit balance in Allowance for Uncollectible Accounts of $5,075. During the current year, Union’s financial records included the following selected activities:

• Sales on account, $298,750

• Sales returns and allowances, $18,250

• Collections from customers, $287,500

• Accounts written off as worthless, $4,000

In the past, 1.6 percent of Union’s net sales have been uncollectible.

REQUIRED

1. Prepare T accounts for Accounts Receivable and Allowance for Uncollectible Accounts. Enter the beginning balances and show the effects on these accounts of the items listed above, summarizing the year’s activity. Determine the ending balance of each account.

2. Compute the amount of uncollectible accounts expense and determine the ending balance of Allowance for Uncollectible Accounts under

(a) The percentage of net sales method

(b) The accounts receivable aging method.

Assume that an aging of the accounts receivable shows that $5,000 may be uncollectible.

3. Compute the receivable turnover and days’ sales uncollected using the data from the accounts receivable aging method in requirement 2.

4. How do you explain that the two methods used in requirement 2 result in different amounts for uncollectible accounts expense? What rationale underlies each method?

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