SK Limited is a merchandising company based in Australia and adopts the allowanc

Question

SK Limited is a merchandising company based in Australia and adopts the allowance method for doubtful accounts. The statement of financial position (balance sheet) at 31 December 2015 showed a credit balance of $58,000 in Allowance for Uncollectible Accounts. During the year ended 31 December 2016, the following transactions occurred:

Required

a) Prepare journal entries to record the transactions during the year ended 31 December 2016. Use a 360-day year when performing interest calculations and round the interest to one decimal place.

b) After reviewing an aged list of accounts receivable at 31 December 2016, the credit manager of the company estimated an amount of $50,000 would become uncollectible. Prepare the allowance for doubtful accounts for the year ended 31 December 2016 (in T-account format).

c) Discuss why the allowance method of accounting for uncollectible accounts is better to match revenue and expense.

Date Transaction 2016 12 January Sold goods to Jeff Wong for $32,000 with one-month credit 20 January Received payment from Alice Lee relating to her 30-day, 9% note for $9,000 that fell due for payment on this date. An accrual had been made for the interest earned up to 31 December 2015. 12 February Accepted a 60-day, 6% note for $32,000 from an existing debtor, Jeff Wong 5 April Wrote off an outstanding debt of $5,000 owed by Andrew Ha who was untraceable 12 April Payment was duly received from Jeff Wong upon the maturity of the note signed on 12 February. 23 May Received payment of $5,000 from Andrew Ha which had been written off on 5 April 30 July Sold goods to Joey Lee by accepting a 90-day, 6% note for $13,000 30 October The note dated 30 July from Joey Lee was dishonoured and returned by the bank. 15 December Wrote off the amount owed by Joey Lee as it was proved to be irrecoverable 18 December Sold goods to Mary Ma by accepting a 60-day, 5% note for $30,000 31 December Recorded the accrued interest on the note from Mary Ma

Explanation / Answer

Allowance method follows matching principle and provide accurate financial position. Hence it is better.

Date Account Title and Explanation Debit Credit 12-Jan Account Receivable $32,000 Sales Revenue $32,000 (To record the sales) 20-Jan Cash $9,810 Note Receivable $9,000 Interest Income $540 Accrued Interest $270 (To record payment received) 12-Feb 6% Note Receivable $32,000 Account Receivable $32,000 (To record the note received) 5-Apr Allowance for Uncollectible Accounts $5,000 Account Receivable $5,000 (To write off bad debt) 12-Apr Cash $32,320 6% Note Receivable $32,000 Interest Income $320 (To record payment received) 23-May Cash $5,000 Allowance for Uncollectible Accounts $5,000 (To record cash received from bad debt) 30-Jul 6% Note Receivable $13,000 Sales Revenue $13,000 (To record the sales) 30-Oct Accounts Receivable $13,000 6% Note Receivable $13,000 (To record the note dishonoured) 15-Dec Allowance for Uncollectible Accounts $13,000 Account Receivable $13,000 (To write off bad debt) 18-Dec 5% Note Receivable $30,000 Sales Revenue $30,000 (To record the sales) 31-Dec Accrued Interest $250 Interest Income $250 (To record interest accrued)

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