Rayon Co. uses the percentage of sales approach to record bad debt expense for its monthly financial statements and the percentage of receivables approach for its year-end financial statements. Rayon Co. has a May 31 fiscal year end, closes temporary accounts annually, and uses the perpetual inventory system.

On March 31, 2021, after completing its month-end adjustments, it had accounts receivable of $89,200, a credit balance of $4,930 in Allowance for Doubtful Accounts, and a debit balance in Bad Debt Expense of $19,880. In April and May, the following transactions occurred:

April

1. Sold $64,600 of merchandise on credit. The cost of the merchandise was $35,530.

2. Accepted $800 of returns on the merchandise sold on credit. These customers were issued credit memos. The merchandise had a cost of $440 and was discarded because it was damaged.

3. Collected $69,200 cash on account from customers.

4. Interest charges of $1,645 were charged to outstanding accounts receivable.

5. As part of the month-end adjusting entries, recorded bad debt expense of 3% of net credit sales for the month.

May

1. Credit sales were $76,600. The cost of the merchandise was $42,130.

2. Received $450 cash from a customer whose account had been written off in March.

3. Collected $78,500 cash, in addition to the cash collected in transaction 2. above, from customers on account.

4. Wrote off $9,580 of accounts receivable as uncollectible.

5. Interest charges of $1,570 were charged to outstanding accounts receivable.

6. Recorded the year-end adjustment for bad debts. Uncollectible accounts were estimated to be 6% 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 May 31, 2021, balance sheet.

c. What amount will be reported as bad debt expense on the income statement for the year ended May 31, 2021?

Discuss the possible reasons that Rayon Co. uses a mix of two approaches to estimate uncollectible accounts.

Transcribed Image Text:

Allowance for Merchandise Accounts Transaction Cash Receivable Doubtful Accounts Total Assets Owner's Inventory Equity April 1 NE -$35,530 +$29,070 +$29,070 NE +$64,600