Financial Accounting-II – Receivables
Net credit sales method and accounts receivable method
PU BBA | BBA-BI | BBA-TT 2nd Semester
PU 2015 Fall (Old) Q. No. 3a
At the beginning of 2014, Global Company’s accounts receivable balance was Rs. 50,000 and balance in allowance for Doubtful Accounts was Rs. 2,000 (Cr.). Globe’s sales in 2014 were Rs. 50,000 80% of which were credit. Collections on account during the were Rs. 300,000. The company wrote off Rs. 10,000 of uncollectible accounts during the year.
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Required:
i. Prepare summary journal entries related to the sales, collections and write-offs of accounts receivable during the 2014.
ii. Prepare journal entries to recognize bad debts assuming that (a) bad debt expense is 4% of credit sales (b) accounts expected to be uncollectible are 10% of the year-end accounts receivable.
iii. What is the net realizable value of accounts receivable on December 31, 2014, under each assumptions.
Solution:
i.
Journal entries
In the books of Global Company
Sales
Cash a/c Dr. Rs. 1,00,000
Accounts receivable a/c Dr. Rs. 4,00,000
Sales revenue a/c Rs. 5,00,000
(TO record the sales made during the period with both cash and credit)
Collections
Cash a/c Dr. Rs. 3,00,000
Accounts receivable a/c Rs. 3,00,000
(To record the collection of cash during the year)
Write-off
Allowance for doubtful accounts a/c Dr. Rs. 10,000
Accounts receivable a/c Rs. 10,000
(To record the bad debt expense written off)
ii. (a)
Bad debt expenses = 4% of net credit sales = 4% of Rs. 4,00,000 = Rs. 16,000
Now,
Journal entry
Bad debt expenses a/c Dr. 16,000
Allowance for bad debt expenses a/c Rs. 16,000
(To record the estimated bad debt expenses 4% of net credit sales)
(b)
Ending accounts receivable = Beginning accounts receivable + Credit sales – Collection during the year – bad debt written off = Rs. 50,000 + 4,00,000 – 3,00,000 – 10,000 = Rs. 1,40,000
Now, Uncollectible expense amount = 10% of year end accounts receivable = 10% of Rs. 1,40,000 = Rs. 14,000
Allowance for the current period = Rs. 14,000 – 2,000 + 10,000 = Rs. 22,000
Journal entry
Uncollectible expense a/c Dr. Rs. 22,000
Allowance for uncollectible expense a/c Rs. 22,000
(To record the allowance for uncollectible expense from year-end accounts receivable)
iii.
Statement of showing comparative net realizable value
| Particulars | Net credit sales (a) | Accounts receivable (b) |
| Accounts receivable Less: Allowance for doubtful accounts | 1,40,000 16,000 | 1,40,000 14,000 |
| Net realizable value | Rs. 1,24,000 | 1,26,00 |