Question
Allowance Method of Accounting for Bad DebtsComparison of the Two Approaches Stonemoss Enterprises had the following data available for 2017 (before making any adjustments): Accounts
-
Allowance Method of Accounting for Bad DebtsComparison of the Two Approaches
Stonemoss Enterprises had the following data available for 2017 (before making any adjustments):
Accounts receivable, 12/31/17 $337,800 Allowance for doubtful accounts 2,600 Net credit sales, 2017 847,000 Required:
1. Identify and analyze the adjustment to recognize bad debts under the following assumptions: (a) bad debts expense is expected to be 2% of net credit sales for the year.
Activity OperatingInvestingFinancingOperating
Accounts Allowance for Doubtful Accounts Increase, Bad Debts Expense IncreaseAllowance for Doubtful Accounts Increase, Bad Debts Expense DecreaseAllowance for Doubtful Accounts Decrease, Bad Debts Expense IncreaseAllowance for Doubtful Accounts Decrease, Bad Debts Expense DecreaseAllowance for Doubtful Accounts Increase, Bad Debts Expense Increase
Statement(s) Balance Sheet onlyIncome Statement onlyBalance Sheet and Income StatementBalance Sheet and Income Statement
Feedback
1) Determine activity. 1a) Financing activities are transactions (other than payment of interest) involving borrowing from creditors or repaying creditors. This also includes transactions with the company's owners. Businesses borrow money or raise money from selling of their stock. 1b) Investing activities are obtaining money by building up operations or purchasing investment products such as stocks, bonds and annuities. 1c) Operating activities are the sale of products and/or services, and the costs incurred to operate a business. 2) Determine financial statement accounts affected, balance sheet or income statement. Determine accounts and amount of increases/decreases. 3) Balance Sheet accounts: Assets = Liabilities + Stockholders' Equity. (Equations must stay in balance) Income Statement accounts: Revenues Expenses = Net Income. 4) Allowance method estimates bad debts on the basis of either the net credit sales of the period or the accounts receivable at the end of the period. 5) Bad Debts Expense recognizes the cost associated with the reduction in asset value, Accounts Receivable. A contra-asset account is used to reduce the asset to its net realizable value. This is accomplished by creating an allowance account, Allowance for Doubtful Accounts. This is a contra account and causes total assets to decrease.
How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.
Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Accounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseCashInterest ReceivableNo EntryAllowance for Doubtful Accounts
fill in the blank cd3154f3afe2fce_2 Accounts PayableAccounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseCashNo EntryNo Entry
fill in the blank cd3154f3afe2fce_4 fill in the blank cd3154f3afe2fce_5 Accounts PayableAccounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseCashNo EntryNo Entry
fill in the blank cd3154f3afe2fce_7 Accounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseCashInterest ReceivableNo EntryBad Debts Expense
fill in the blank cd3154f3afe2fce_9 fill in the blank cd3154f3afe2fce_10 Feedback
Partially correct
(b) Stonemoss expects it will not be able to collect 6% of the balance in accounts receivable at year-end.
Activity OperatingInvestingFinancingOperating
Accounts Allowance for Doubtful Accounts Increase, Bad Debts Expense IncreaseAllowance for Doubtful Accounts Increase, Bad Debts Expense DecreaseAllowance for Doubtful Accounts Decrease, Bad Debts Expense IncreaseAllowance for Doubtful Accounts Decrease, Bad Debts Expense DecreaseAllowance for Doubtful Accounts Increase, Bad Debts Expense Increase
Statement(s) Balance Sheet onlyIncome Statement onlyBalance Sheet and Income StatementBalance Sheet and Income Statement
Feedback
In applying the percentage of accounts receivable to estimate bad debts expense, the balance already in the allowance account is used and the focus is on the balance sheet. Multiply uncollectible percentage by the ending balance in accounts receivable. The amount determined uncollectible will be the new ending balance for the Allowance for Doubtful Accounts. The change in the Allowance account is the bad debt expense.
How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.
Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Accounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseCashInterest RevenueNo EntryAllowance for Doubtful Accounts
fill in the blank 00b6ce04efc2ff3_2 Accounts PayableAllowance for Doubtful AccountsBad Debts ExpenseCashNotes ReceivableNo EntryNo Entry
fill in the blank 00b6ce04efc2ff3_4 fill in the blank 00b6ce04efc2ff3_5 Accounts PayableAllowance for Doubtful AccountsBad Debts ExpenseCashNotes ReceivableNo EntryNo Entry
fill in the blank 00b6ce04efc2ff3_7 Accounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseCashInterest RevenueNo EntryBad Debts Expense
fill in the blank 00b6ce04efc2ff3_9 fill in the blank 00b6ce04efc2ff3_10 Feedback
Partially correct
2. Assume instead that the balance in the allowance account is a negative $2,600. How will this affect your answers to part (1)?
(a) bad debts expense is expected to be 2% of net credit sales for the year.
Activity OperatingInvestingFinancingOperating
Accounts Allowance for Doubtful Accounts Increase, Bad Debts Expense IncreaseAllowance for Doubtful Accounts Increase, Bad Debts Expense DecreaseAllowance for Doubtful Accounts Decrease, Bad Debts Expense IncreaseAllowance for Doubtful Accounts Decrease, Bad Debts Expense DecreaseAllowance for Doubtful Accounts Increase, Bad Debts Expense Increase
Statement(s) Balance Sheet onlyIncome Statement onlyBalance Sheet and Income StatementBalance Sheet and Income Statement
Feedback
Under the percentage of credit sales approach the emphasis is on the bad debts expense and income statement. The balance in the allowance account before adjustment is ignored.
How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.
Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Accounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseCashInterest ReceivableNo EntryAllowance for Doubtful Accounts
fill in the blank cae1b6fe3fb4f97_2 Accounts PayableAccounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseCashNo EntryNo Entry
fill in the blank cae1b6fe3fb4f97_4 fill in the blank cae1b6fe3fb4f97_5 Accounts PayableAccounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseCashNo EntryNo Entry
fill in the blank cae1b6fe3fb4f97_7 Accounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseCashInterest ReceivableNo EntryBad Debts Expense
fill in the blank cae1b6fe3fb4f97_9 fill in the blank cae1b6fe3fb4f97_10 Feedback
Partially correct
(b) Stonemoss expects it will not be able to collect 6% of the balance in accounts receivable at year-end.
Activity OperatingInvestingFinancingOperating
Accounts Allowance for Doubtful Accounts Increase, Bad Debts Expense IncreaseAllowance for Doubtful Accounts Increase, Bad Debts Expense DecreaseAllowance for Doubtful Accounts Decrease, Bad Debts Expense IncreaseAllowance for Doubtful Accounts Decrease, Bad Debts Expense DecreaseAllowance for Doubtful Accounts Increase, Bad Debts Expense Increase
Statement(s) Balance Sheet onlyIncome Statement onlyBalance Sheet and Income StatementBalance Sheet and Income Statement
Feedback
The amount determined uncollectible will be the new ending balance for the Allowance for Doubtful Accounts. The change in the Allowance account is the bad debt expense.
How does this entry affect the accounting equation? If a financial statement item is not affected, select "No Entry" and leave the amount box blank. If the effect on a financial statement item is negative, i.e, a decrease, be sure to enter the answer with a minus sign. Remember: if a contra account is increased, it will have the effect of decreasing the corresponding financial statement item.
Balance Sheet Income Statement Stockholders' Net Assets = Liabilities + Equity Revenues Expenses = Income Accounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseCashInterest RevenueNo EntryAllowance for Doubtful Accounts
fill in the blank 00a165fb5f8e056_2 Accounts PayableAllowance for Doubtful AccountsBad Debts ExpenseCashNotes ReceivableNo EntryNo Entry
fill in the blank 00a165fb5f8e056_4 fill in the blank 00a165fb5f8e056_5 Accounts PayableAllowance for Doubtful AccountsBad Debts ExpenseCashNotes ReceivableNo EntryNo Entry
fill in the blank 00a165fb5f8e056_7 Accounts ReceivableAllowance for Doubtful AccountsBad Debts ExpenseCashInterest RevenueNo EntryBad Debts Expense
fill in the blank 00a165fb5f8e056_9 fill in the blank 00a165fb5f8e056_10 Feedback
Partially correct
Feedback
Partially correct
Check My Work
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Accounting Principles
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
10th Edition
1119491630, 978-1119491637, 978-0470534793
