Financial Accounting-II – Receivables
Net credit sales method and accounts receivable method
PU BBA | BBA-BI | BBA-TT 2nd Semester
PU 2015 Spring Q. No. 12
At the beginning of 2015, Ralf Co’s accounts receivable balance was Rs. 140,000 and the balance in the allowance for doubtful debt accounts was Rs. 2350 (Cr.). The company’s sales in 2015 were Rs. 1,050,000, 90 percent of which were on credit. Collections on account during the year were Rs. 670,000. The company wrote off Rs. 8000 of uncollectible accounts during the years.
Required:
i) Prepare necessary journal entries related to the sales, collections, and write-offs of accounts receivable during 2015.
ii) Prepare journal entries to recognize bad debts assuming (1) bad debt expense is 3% of credit sales and (2) amounts expected to be uncollectible are 6% of the year-end accounts receivable.
iii) What is the net realizable value of accounts receivable on December 31, 2015, under each assumption in the above part “ii”? [10]
Solution:
i.
Journal entries
In the books of Ralf’s Co’s
Sales
Casha a/c Dr. Rs. 1,05,000
Accounts receivable a/c Rs. 9,45,000
Sales revenue a/c Rs. 10,50,000
(To record the sales during the year in both cash and credit)
Collections
Cash a/c Dr. Rs. 6,70,000
Accounts receivable a/c Rs. 6,70,000
(To record the collection of cash during the year)
Write off
Allowance for doubtful debt account a/c Dr. Rs. 8,000
Accounts receivable a/c Rs. 8,000
(To record the written off allowance for the doubtful account)
ii. (1)
Bad debt expense = 3% on net credit sales = Rs. 28,350
Journal entry
Bad debt expense a/c Dr. Rs. 28,350
Allowance for bad debt expense a/c Rs. 28,350
(To record the allowance for bad debt expense of 3% of net credit sales)
(2) Under percentage of accounts receivable method
Year end accounts receivable = Beginning accounts receivable + Credit sales – Collections during the year – Bad debt written off = Rs. 1,40,000 + 9,45,000 – 6,70,000 – 8,000 = Rs. 4,07,000
Estimated Bad debt expense = 6% of year-end accounts receivable = Rs. 24,420
Current year allowance = Rs. 24,420 – 2,350 + 8,000 = Rs. 30,070
Now,
Journal entry
Bad debt expense a/c Rs. 30,070
Allowance for bad debt expense a/c Rs. 30,070
(To record the allowance for bad debt expense of 6% of year-end accounts receivable)
iii.
Statement of comparative net realizable value of accounts receivable
| Particulars | Net credit sales (1) | Accounts receivable (2) |
| Accounts receivable Less: Allowance for bad debt expense | 4,07,000 28,350 | 4,07,000 24,420 |
| Net, realizable value | Rs. 3,78,650 | Rs. 3,82,580 |
See, also the related article
PU 2015 Fall Q. No. 13, accounts receivable method, & credit sales method