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Financial Accounting-II – Receivables
Net credit sales method and accounts receivable method
PU BBA | BBA-BI | BBA-TT 2nd Semester
PU 2014 Spring Q. No. 13
Trade Link (P) Ltd is the only wholesale distributor of tracking material in Western region. It has policy of making sales on 30-day credit terms. Its’ annual sales are approximately Rs. 14,00,000 of which 75% are on credit. At the end of December, 2013, accounts receivable were presented in the company’s balance sheet as follows:
| Account receivable from customers | Rs. 150,000 |
| Less: Allowance for doubtful accounts | 9,000 |
| Net realizable value of Acc. receivable | 141,000 |
During 2014, Rs. 10,000 in accounts receivable were written of as uncollectible. Company collected total Rs. 990,000 from the credit sales made.
Trade link has policy of estimating year end allowance for doubtful debt based on 6% of ending account receivables. It prepares annual financial statements. Therefore, it makes adjusting entries in its accounting records at the end of calendar year.
Required:
i. Prepare all necessary journal entry related to sales, collections, and accounts written off against the allowance for doubtful accounts during 2014. [4]
ii. Prepare an adjusting entry required at December 31, 2014, to increase the allowance for doubtful accounts up to 6% of the year end account receivables. [4]
iii. Prepare partial balance sheet at the end of December 31, 2014 to show net realizable value of account receivables. [7]
Solution:
i
Journal entries
In the books of Trade Link (p) Ltd.
Sales
Cash a/c Dr. Rs. 3,50,000
Accounts receivable a/c Dr. Rs. 10,50,000
Sales revenue a/c Rs. 14,00,000
(To record the sales during the year in both cash and credit)
Collections
Cash a/c Dr. Rs. 9,90,000
Account receivable a/c Rs. 9,90,000
(To record the collection of cash)
Write off
Allowance for doubtful accounts a/c Dr. Rs. 10,000
Accounts receivable a/c Rs. 10,000
(To record the written off allowance for the doubtful account)
ii. using accounts receivable method
Ending accounts receivable = Beginning accounts receivable + Credit sales – Collected amount – Written off = 1,50,000 + 10,50,000 – 9,90,000 – 10,000 = Rs. 2,00,000
| Required balance in allowance = 6% of Rs. 2,00,000 Less: Existing balance Add: Bad debt written off Allowance to be made for the year | Rs. 12,000 9,000 10,000 Rs. 13,000 |
Now,
Journal entry
Bad debt expense a/c Dr. Rs. 13,000
Allowance for bad debt expense a/c Rs. 13,000
(To record the allowance for bad debt expense)
iii.
Trade Link (P) Ltd.
Partial Balance sheet
As on December 31, 2014
| Current assets | Amount (Rs.) |
| Accounts receivable Less: Allowance for doubtful accounts | 2,00,000 12,000 |
| Net realizable value | Rs. 1,88,000 |