The ABC Company sells magazines directly to retail outlet stores. ABC sends maga
ID: 2482731 • Letter: T
Question
The ABC Company sells magazines directly to retail outlet stores. ABC sends magazines with an invoice to the stores on the first day of the quarter. ABC allows these stores to return 20 percent of their unsold magazines. However, based on historical data, normally the stores only returns 12 percent of their magazines to ABC. These return sales are computed by multiplying 12 percent of ABC’s credit sales. The stores are required to return any unsold magazines on the last day of the quarter. For this exercise, magazines in the amount of $1,890,000 were shipped to the stores with invoices on 10/1/15. The stores need to return any unsold magazines on December 31, 2015. On 1/1/16 ABC shipped $2,250,000 of magazines with invoices to the stores. The stores need to return any unsold magazines on March 31, 2016. Also, there are some stores that do not pay their balance owed for the magazines that they did sell, resulting in bad debts.
The following information relates to ABC's accounts receivable for the 4th Qtr 2015 (includes adjusting and closing entries) and the 1st Qtr 2016 prior to closing entries:
Accounts receivable, 10/1/15 $ 675,000
Credit sales for 4th Qtr 2015 1,890,000
Credit sales for 1st Qtr 2016 2,250,000
Sales returns for 4th Qtr 2015 378,000
Sales returns for 1st Qtr 2016 450,000
Sales discounts for 4th Qtr 2015 13,608
Sales discounts for 1st Qtr 2016 16,200
Estimated bad debt expense for 4th Qtr 2015 based on 3rd Qtr 2015 sales a(recorded 9/30/15) 26,460
Estimated Bad debt expense for 1st Qtr 2016 based on 4th Qtr 2015 sales (recorded 12/31/15) 31,500
Estimated bad debt expense for 2nd Qtr 2016 based on 1st Qtr 2016 sales (recorded 3/31/16) 37,800
Collections from customers during 4th Qtr 2015 1,398,600 Collections from customers during 1st Qtr 2016 1,665,000
Allowance for uncollectible accounts at 12/31/15 Before adjusting entry for bad debts 1,800 Cr
Allowance for uncollectible accounts at 3/31/16 Before adjusting entry for bad debts 2,143 Cr
Allowance for sales returns account at 3/31/16 -0- Cr ABC uses the gross method of recording accounts receivable.
ABC also uses the percent of accounts receivable aging schedule to estimate uncollectible accounts. On 12/31/15 ABC recorded their estimated bad debts for 1st Qtr 2016 to be $31,500. ABC also sets up an allowance for sales returns. On 10/1/15 ABC estimated their sales returns to be $226,800 ($1,890,000 x 12%) and on 1/1/16 ABC estimated sales returns for 1st Qtr 2016 to be $270,000 ($2,250,000 x 12%).
QUESTION TO BE ANSWERED:
What amount should ABC report for net accounts receivable at March 31, 2016?
Include the adjusting entries, but not the closing entries.
Explanation / Answer
It has been assumed that the discount given in the question is for Cash Sales, as we generally have the discount for Cash sale only. So, the discount has not been deducted from Net Receivable. (The Students can also deduct it if they assume the discounts to be given on Credit sale, in that case the Net Receivable will be reduced by discount amount ($13608+$16200=$29808).
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