Financial Accounting-II – Receivables
Credit sales method and accounts receivable method
PU BBA | BBA-BI | BBA-TT 2nd Semester
PU 2011 Fall Q. No. 2
At the beginning of 2009, Sharma and Company’s account receivable balance was Rs. 1,40,000 and the balance in the allowance for doubtful accounts was Rs. 2,350 (cr.). Its sales in that year were Rs. 10,50,000, 80% of which were on credit. Collections on account during the year were Rs. 6,70,0000. The Company wrote off Rs. 4,000 of uncollectible accounts during the year.
Required:
a. Prepare summary journal entries related to the sales, collections, and write-off of accounts receivable during 2009. [2+2+2]
b. Prepare journal entries to recognize bad debts assuming (i) bad debts expense is 3% of credit sales and (ii) amounts expected to be uncollectible are 6% of the year-end accounts receivable. [2.5+2.5]
c. What is the net realizable value of accounts receivable on December 31st, 2006 under each assumption (i) and (ii) in part (b)? [2+2]
Solution:
a.
Journal entries
In the books of Sharma and Company’s
Sales
Cash a/c Dr. Rs. 2,10,000
Accounts receivable a/c Dr. Rs. 8,40,000
Sales revenue a/c Rs. 10,50,000
(To record the sales during the year with both cash and on credit)
Collection
Cash a/c Dr. Rs. 6,70,000
Accounts receivable a/c Rs. 6,70,000
(To record the collections during the year)
Write off
Allowance for doubtful accounts a/c Dr. Rs. 4,000
Accounts receivable a/c Rs. 4,000
(To record the write off of bad debts)
b. (i) Under credit sales method
Bad debts on credit sales = 3% of credit sales = 3% of 8,40,000 = Rs. 25,200
Journal entry
Bad debt expense a/c Dr. 25,200
Allowance for doubtful accounts a/c Rs. 25,200
(To record the allowance for doubtful accounts of 3% of net credit sales)
(ii) Under accounts receivable method
Ending accounts receivable = Beginning accounts receivable + Credit sales – Collection during the year – Written off = 1,40,000 + 8,40,000 – 6,70,000 – 4,000 = Rs. 3,06,000
| Required allowance (6% of 3,06,000) Less: Allowance for doubtful accounts (Cr.) Add: Written off | Rs. 18,360 Rs. 2,350 Rs. 4,000 |
| Current year allowance | Rs. 20,010 |
Now,
Journal entry
Bad debt expense a/c Dr. Rs. 20,010
Allowance for doubtful accounts a/c Rs. 20,010
(To record the estimated allowance for doubtful accounts of 6% of account receivables)
c.
Comparative net realizable value of accounts receivable
| Particulars | Net credit sales | Accounts receivable |
| Accounts receivable Less: Allowance for doubtful accounts | Rs. 3,06,000 25,200 | Rs. 3,06,000 18,360 |
| Net realizable value | Rs. 2,80,800 | Rs. 2,87,640 |