On February 28, Tradewinds Sailing Supplies had a $75,000 debit balance in Accou

Question

On February 28, Tradewinds Sailing Supplies had a $75,000 debit balance in Accounts Receivable and a $2,200 credit balance in Allowance for Uncollectible Accounts. During March, Tradewinds made Sales on account, $410,000 Collections on account, $419,000 Write-offs of uncollectible receivables, $7,000 Requirements 1. Record sales and collections on account. Then record uncollectible-account expense and write-offs of customer accounts using the allowance method. Uncollectible-account expense was estimated at 2% of credit sales. Show all March activity in Accounts Receivable, Allowance for Uncollectible Accounts, and Uncollectible-Account Expense (post to these T-accounts). 2. Suppose Tradewinds used a different method to account for uncollectible receivables. Record sales and collections on account. Then record uncollectible-account expense for March using the direct writeoff method. Post to Accounts Receivable and Uncollectible-Account Expense and show their balances at March 31. 3. What amount of uncollectible-account expense would Tradewinds report on its March income statement under each of the two methods? Which amount better matches expense with revenue? Give your reason. 4. What amount of net accounts receivable would Tradewinds report on its March 31 balance sheet under each of the two methods? Which amount is more realistic? Give your reason.

Explanation / Answer

Tradewings Sailing Supplies All Amounts in $ 1. Journal Entries Accounts Receivable A/c 410000 To Sales A/c 410000 Cash A/c 419000 To Accounts Receivable A/c 419000 Uncollectible Accounts using Allowance Method Uncollectible Accounts A/c 8200 To Allowance for Uncollectible Accounts A/c 8200 Account Receivable Write-offs A/c 7000 To Uncollectible Accounts A/c 7000 Accounts Receivable A/c 01-Mar To Balance b/fd 75000 By Cash A/c 419000 To Sales A/c 410000 By Balance c/fd 66000 Allowance for Uncollectible Accounts A/c To Balance c/fd 10400 01-Mar By Balance b/fd 2200 By Uncollectible Accounts A/c 8200 Uncollectible Accounts A/c To Allowance for 8200 By Accounts Receivable Write-Offs A/c 7000 Uncollectible Accounts A/c By Balance c/fd 1200 2. Journal Entries Accounts Receivable A/c 410000 To Sales A/c 410000 Cash A/c 419000 To Accounts Receivable A/c 419000 Uncollectible Accounts using Write-Off Method Account Receivable Write-offs A/c 7000 To Accounts Receivable A/c 7000 Accounts Receivable A/c 01-Mar To Balance b/fd 75000 By Cash A/c 419000 To Sales A/c 410000 By Accounts Receivable Write-Offs A/c 7000 By Balance c/fd 59000 Accounts Receivable Write-Offs A/c To Accounts Receivable A/c 7000 By Balance c/fd 7000 3. Uncollectible Account Expense Recorded in Income Statement Under Allowance Method 1200 Under Write-Off Method 7000 The allowance method is a better match for expense with revenue, since it considers both the provision for doubtful debts as well as the write-off of accounts receivable, based on non-receipt of amounts from customers. 4. Net Accounts Receivable in the Balance Sheet Under Allowance Method 66000 Under Write-Off Method 59000 The allowance method is a better working method for calculating the Net Accounts Receivable since it shows the Accounts Receivable, net of Provision (if any) for Doubtful debts, which is based on the actual turnover for the year. Receivables written off are directly adjusted in the Income Statement, without any impact thereof on the Balance Sheet.

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