ALLOWANCE METHOD - SALES APPROACH SITUATION ONE-COMPANY A BALANCES These are the balances before dealing with "bad" customers. RECORD THE FOLLOWING ENTRIES Write off a customer with a balance of $100. Write off a customer with a balance of $200. A B C1 Customer from A ends up sending you cash for $100. STEP 1: Bring back the receivable. C2 STEP 2: Record the payment of the receivable. D The business uses a percentage of sales approach and determines that 3% of sales may not be colleted. Record any needed adjustment. QUESTIONS: What is the net income for the period above? What is the net receivable (or realizable) value? What is the accounts receivable turnover ratio? (a/r turnover ratio = sales/accounts receivable) What is the days in accounts receivable number (365/ AR turnover ratio from above) What is the net income percentage/ratio? What is the debt to asset ratio? What is ending retained earnings? ASSETS LIAB + EQUITY CASH 15,000 3,000 ALLOWANCE ACCOUNTS FOR RECEIVABLE DOUBTFUL ACCOUNTS (500) INVESTMENTS = BANK LOAN PAYABLE CAPITAL RETAINED EARNINGS REVENUE OTHER EXPENSES BAD DEST EXPENSE to 1,000 = 1,000 + 5,000 4,500 10,000 (2,000) 0