PRACTICE PROBLEM 4 Burke & Co are in the wholesale steel business. They have bee

Question

PRACTICE PROBLEM 4 Burke & Co are in the wholesale steel business. They have been in this business for many years and have experienced a steady increase intherbusiness over the years. About 90% oftheir sales are to customers on account and this relationship has remained steady over the years. During the past year, Burke had sales of $8,600,000. $1,075,000 in accounts receivable at the end of its fiscal year. The company had a balance of These accounts had the following aging: $645,000 $215,000 $107,500 75,250 32,250 Current 31 to 60 days 61 to 90 days 91 to 120 days Over 120 days The Company uses the percentage of sales method to calculate bad debts expense for the period and history has indicated that bad debts will be approximate 1.5% of credit sales. At the end of the accounting period, the allowance for doubtful accounts contained a credit balance of $15,000. Required: (a) Prepare journal entries to record bad debts expense for the period using the approach the (b) Prepare journal entries to record the bad debts expense for the period if the Company Company has always used. used the aging approach and if the categories above were estimated to have estimated doubtful accounts of596; 10%; 25%,50%; and, 75% respectively. (c) Comment on the different approaches used.

Explanation / Answer

1 Sales on account 7740000 (8600000*90%) Percentage of bad debt 1.50% As per sales method allowance for doubtful accounts 116100 (7740000*1.5%) Less Current balance of allowance for doubtful accounts 15000 Bad debt expense 101100 Bad debt expense 101100              Allowance for doubtful accounts 101100 2 Allowance for doubtful accounts aging method Accounts receivable % Amount 0-30 days 645000 5% 32250 31-60 Days 215000 10% 21500 61-90 Days 107500 25% 26875 91-120 Days 75250 50% 37625 over 120 days 32250 75% 24188 Total 1075000 142438 As per aging method current balance should be 142438 the current balance is 15000 The current balance is low by 127438 Bad debt expense 127438              Allowance for doubtful accounts 127438

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