Financial Accounting-II – Receivables
Net credit sales method and accounts receivable method
PU BBA | BBA-BI | BBA-TT 2nd Semester
PU 2015 Fall Q. No. 13
At the beginning of 2014, Cubs Corp. account receivable balance was Rs. 25,000 and the allowance for doubtful debt was Rs. 8,000 (Cr.). During the year sales made Rs. 800,000 of which 80% on credit. Collection during the year was Rs. 500,000. The company wrote off Rs. 5,000 of uncollectible accounts during the year.
[10]
a) Prepare journal entries to recognize bad debts assuming that (a) bad debt expenses is 5% of credit sales and (b) Bad debt expenses is 10% of year-end account receivable.
b) What is the net realizable value of account receivable on December 31, 2014 under each assumption above ?
c) Why allowance method of accounting for doubtful debt is better than direct method?
Solution:
a) (a)
Ne credit sales = 80% of Rs. 8,00,000 = Rs. 6,40,000
Bad debt expenses = 5% of Net credit sales = 32,000
Now,
Journal entry
Bad debt expenses a/c Dr. Rs. 32,000
Allowance for bad debt expenses a/c Rs. 32,000
(To record the allowance of bad debt expense of 5% of net credit sales)
(b)
Year end accounts receivable = Beginning account receivable + Net credit sales – Collections during the year – Bad debt written off = Rs. 25,000 + 6,40,000 – 5,00,000 – 5,000 = Rs. 1,60,000
Estimated bad debt expenses = 10% of year end account receivable = Rs. 16,000
Allowance for the current period = Rs. 16,000 – 8,000 + 5,000 = Rs. 13,000
Now,
Journal entry
Bad debt expenses a/c Dr. Rs. 13,000
Allowance for bad debt expenses a/c Rs. 13,000
(To record the allowance for uncollectible expenses of 10% of year-end account receivable)
b)
Statement of showing comparative net realizable value
| Particulars | Net credit sales (a) | Accounts receivable (b) |
| Accounts receivable Less: Allowance for bad debt expenses | 1,60,000 32,000 | 1,60,000 16,000 |
| Net realizable value | Rs. 1,28,000 | Rs. 1,44,000 |
c)
The allowance of accounting method for doubtful debt is better than direct method because the allowance method matches uncollectible expense of the current period with the related revenues of the period. The direct method violates the matching principle because the return from the sales is earned in one period and the expense of the bad debt is not recognized until a significant time later.