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Question 3 (Total 20 marks) Part A Banana Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 3.6% of accounts
Question 3 (Total 20 marks) Part A Banana Company uses the allowance method in accounting for uncollectible accounts. Past experience indicates that 3.6% of accounts receivable will eventually be uncollectible. Selected account balances at December 31, 20X0, and December 31, 20X1, appear below: Net Credit Sales Accounts Receivable Allowance for Doubtful Accounts | 12/31/20X0 $850,000 640,000 12,000 12/31/20X1 $960,000 750,000 ? 15 Required (a) Prepare the journal entries and record the following events in 20X1. Jun. Determined that the account of Albert Wong for $2,750 is uncollectible. July. 09 Determined that the account of Kenneth Chan for $6,750 is uncollectible. Sep. 10 Received a check for $1,550 as payment on account from Albert Wong, whose account had previously been written off as uncollectible. He indicated the remainder of his account would be paid in December. Dec. 02 Received a check for $1,200 from Albert Wong as payment on his account. (2 marks) (b) Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 20X1. (1 marks) (c) What is the balance of Allowance for Doubtful Accounts at December 31, 20X1? (2 marks) Part B Pear Company has the following transactions related to notes receivable during the last 2 months of 20x0. Nov. 1 Loaned $45,000 cash to Sara Lui on a 1-year, 5% note. Dec. 11 Sold goods to Magic World Limited, receiving a $65,000, 90-day, 6.5% note. 16 Received an $12,500, 6-month, 7% note in exchange for Good Bullet Company's outstanding accounts receivable. 31 Accrued interest revenue on all notes receivable. Required: (a) Journalize the transactions for Pear Company. (2 marks) (b) Record the collection of the Sara Luis note at its maturity in 20X1. (3 marks) Part C You are the accounting manager of Orange Company. One day, the CEO of the company talked to you that he could not understand why cash realizable value does not decrease when an uncollectible account is written off under the allowance method. Besides, the CEO also wanted the accounting department to be less restrictive in granting credit to customers. "How can our sales managers sell anything when you guys won't approve granting more credit to our customers?" Required: (a) Clarify the point regarding the question raised by the CEO in the first paragraph. (2 marks) (b) Respond to the CEO's comment in the second paragraph by indicating the advantages and disadvantages of easy credit and the corresponding accounting implications
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