Allowance Method for Doubtful Accounts Averys All-Natural Company supplies wigs and hair care products to beauty salons throughout Texas and the Southwest. The accounts receivable clerk for Averys All-Natural prepared the following aging-of-receivables schedule as of the end of business on December 31, 2007: Days Past Due Not Past Customer Balance Due 1-30 31-60 61-90 91-120 Over 120 AAA Beauty 27,500 27,500 Amelia's Wigs 3,750 3,750 Zim's Beauty 1,650 1,650 Totals 1,100,000 750,000 180,000 75,000 45,000 22,000 28,000 Averys All-Natural Company has a past history of uncollectible accounts by age category, as follows: Percent Age Class Uncollectible Not past due 1 % 1-30 days past due 3 31-60 days past due 7 61-90 days past due 16 91-120 days past due 40 Over 120 days past due 90 Instructions: 1. Estimate the allowance for doubtful accounts, based on the aging-of-receivables schedule. 59,350 2. Assume that the allowance for doubtful accounts for Averys All-Natural Company has a negative balance of $(2,250) before adjustment on December 31, 2017. Illustrate the effect on the accounts and financial statements of the adjustment for uncollectible accounts. If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts. Balance Sheet Assets Liabilities + Stockholders' Equity Allowance for doubtful accounts + Accounts receivable No effect Retained earnings 2017 Dec. 31 57,100 0 0 -57,100 Statement of Cash Flows Income Statement No effect 0 Bad debt expense -57,100 3. Averys All-Natural Company reported credit sales of $2,400,000 during 2017. Assume that instead of using the analysis of receivables method of estimating uncollectible accounts, Averys All- Natural uses the percent of sales method and estimates that 2.5% of sales will be uncollectible. Illustrate the effect on the accounts and financial statements of the adjustment for uncollectible accounts using the percent of sales method. If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts. Balance Sheet Assets Liabilities Stockholders' Equity Allowance for doubtful accounts + Merchandise inventory No effect Retained earnings 2017 Dec. 60,000 0 o -60,000 31 Statement of Cash Flows Income Statement No effect 0 Bad debt expense -60,000 4. Assume that on March 4, 20Y8, Averys All-Natural wrote off the $2,950 account of Superior Images as uncollectible. Illustrate the effect on the accounts and financial statements of the write-off of the Superior Images account. If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts. Balance Sheet Assets Liabilities Stockholders' Equity Accounts receivable Allowance for doubtful accounts No effect + Retained earnings 2048 Mar. 4 -2,950 -2,950 0 0 Statement of Cash Flows Income Statement No effect 0 No effect 0 5. Assume that on August 17, 20Y8, Superior Images paid $2,950 on its account. Illustrate the effect on the accounts and financial statements of reinstating and collecting the Superior Images account. (a) Reinstatement If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts. Balance Sheet Assets Liabilities + Stockholders' Equity Cash Allowance for doubtful accounts No effect + No effect 2018 Aug. 17 2,950 2,950 0 o Statement of Cash Flows Income Statement Financing 2,950 No effect 0 (b) Collection If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts. Balance Sheet Assets Liabilities Stockholders' Equity 2018 Aug. 17 Statement of Cash Flows Income Statement 6. Assume that instead of using the allowance method, Averys All-Natural uses the direct write-off method. Illustrate the effect on the accounts and financial statements of the following: a. The write-off of the Superior Images account on March 4, 20Y8. If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts. Balance Sheet Assets Liabilities + Stockholders' Equity 2048 Mar. 4 Statement of Cash Flows Income Statement b. The (1) reinstatement and (2) collection of the Superior Images account on August 17, 20Y8. (1) reinstatement If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts. Balance Sheet Assets Liabilities + Stockholders' Equity 2018 Aug. 17 Statement of Cash Flows Income Statement (2) collection If no account or activity is affected, select "No effect" from the dropdown and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts. Balance Sheet Assets Liabilities + Stockholders' Equity 2048 Aug. 17 Statement of Cash Flows Income Statement