Direct write-off method and percent of sales allowance method

(Learning Objectives 4 & 5) 20–25 min.

On March 31, King’s Tennis Equipment had a $210,000 debit balance in Accounts Receivable. During April, King’s Tennis Equipment had the following transactions:

• Sales of $510,000, all on credit. Ignore cost of goods sold.

• Collections on account, $525,000.

• Write-offs of uncollectible receivables, $5,000.

Requirements 1. Assume that King’s Tennis Equipment uses the allowance method to account for uncollectible accounts and that there was a $6,300 credit balance in the allowance account on March 31. Prepare journal entries to record sales (ignore cost of goods sold), collections on account, and write-offs of uncollectible accounts for the month of April. Next, assuming that bad debt expense is estimated at 4%

of credit sales, prepare the adjusting journal entry to record bad debts expense.

Enter the beginning balances and post all April activity in T-accounts for Accounts Receivable, Allowance for Uncollectible Accounts, and Bad Debt Expense.

2. Suppose that instead of the allowance method, King’s Tennis Equipment uses the direct write-off method to account for uncollectible receivables. Prepare journal entries to record sales, collections on account, and write-offs of uncollectible accounts for the month of April. Enter the beginning balances and post all April activity in T-accounts for Accounts Receivable and Bad Debt Expense.

3. What amount of Bad Debt Expense would King’s Tennis Equipment report on its April income statement under each of the two methods? Which amount better matches expense with revenue? Give your reasoning.

4. What amount of net accounts receivable would King’s Tennis Equipment report on its April 30 balance sheet under each of the two methods? Which amount is more realistic? Give your reasoning.

AppendixLO1