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Practice Seta
P8-44 Accounting for uncollectible accounts using the allowance method and reporting net
accounts receivable on the balance sheet
This problem continues the Crystal Clear Cleaning problem begun in Chapter 2 and continued through
Chapter 7.
Crystal Clear Cleaning uses the allowance method to estimate bad debts. Consider the following
April 2019 transactions for Crystal Clear Cleaning:
Apr. 1 Performed cleaning service for Debbie’s D-list for $13,000 on account
with terms n/20.
10 Borrowed money from First Regional Bank, $30,000, making a
180-day, 12% note.
12 After discussions with customer More Shine, Crystal Clear has
determined that $230 of the receivable owed will not be collected.
Wrote off this portion of the receivable.
15 Sold goods to Warner for $9,000 on account with terms n/30. Cost of
Goods Sold was $4,500.
28 Sold goods to Lelaine, Inc. for cash of $2,800 (cost $840).
28 Collected from More Shine, $230 of receivable previously written off.
29 Paid cash for utilities of $150.
30 Created an aging schedule for Crystal Clear Cleaning for accounts
receivable. Crystal Clear determined that $7,000 of receivables
outstanding for 1–30 days were 3% uncollectible, $10,000 of
receivables outstanding for 31–60 days were 20% uncollectible, and
$5,870 of receivables outstanding for more than 60 days were 30%
uncollectible. Crystal Clear Cleaning determined the total amount of
estimated uncollectible receivables and adjusted the Allowance for
Bad Debts. Assume the account had an unadjusted credit balance of
$260. (Round to nearest whole dollar.)
Requirements
1. Prepare all required journal entries for Crystal Clear. Omit explanations.
2. Show how net accounts receivable would be reported on the balance sheet as of April 30, 2019.
P8-44, cont.
Requirement 1, cont.
Requirement 2
Critical Thinking
Tying It All Together Case 8-1
Sears Holdings Corporation is the parent company of Kmart Holding Corporation and Sears, Roebuck
and Co. The corporation operates more than 1,600 retail stores in the United States and offers online
shopping through both sears.com and kmart.com.
Requirements
1. On which financial statement would you find Accounts Receivable?
2. What was the amount of Accounts Receivable as of January 30, 2016? As of January 31, 2015?
3. Review the notes to the financial statements and read the note labeled Allowance for Doubtful
Accounts in Note 1–Summary of Significant Accounting Policies. What was the amount of
Allowance for Doubtful Accounts as of January 30, 2016? As of January 31, 2015?
4. Using the information from requirements 2 and 3, determine the gross amount of Accounts
Receivable as of January 30, 2016. As of January 31, 2015.
5. Find Schedule II—Valuation and Qualifying Accounts included in the notes to the financial
statements. Draw a T-account that details the changes in the Allowance for Doubtful Accounts
account for 2015. What would additions charged to costs and expenses represent? What would
deductions from the account represent?
SOLUTION
Decision Case 8-1
Weddings on Demand sells on account and manages its own receivables. Average experience for the past
three years has been as follows:
Sales $ 350,000
Cost of Goods Sold 210,000
Bad Debts Expense 4,000
Other Expenses 61,000
Unhappy with the amount of bad debts expense she has been experiencing, Aledia Sanchez,
controller, is considering a major change in the business. Her plan would be to stop selling on account
altogether but accept either cash, credit cards, or debit cards from her customers. Her market research
indicates that if she does so, her sales will increase by 10% (i.e., from $350,000 to $385,000), of which
$200,000 will be credit or debit card sales and the rest will be cash sales. With a 10% increase in sales,
there will also be a 10% increase in Cost of Goods Sold. If she adopts this plan, she will no longer have
bad debts expense, but she will have to pay a fee on debit/credit card transactions of 2% of applicable
sales. She also believes this plan will allow her to save $5,000 per year in other operating expenses.
Should Sanchez start accepting credit cards and debit cards? Show the computations of net income
under her present arrangement and under the plan.
SOLUTION
Decision Case 8-2
Pauline’s Pottery has always used the direct write-off method to account for uncollectibles. The
company’s revenues, bad debt write-offs, and year-end receivables for the most recent year follow:
Year Revenues Write-off
s
Receivables at
Year-end
2018 $ 150,000 $ 3,900 $ 14,000
The business is applying for a bank loan, and the loan officer requires figures based on the allowance
method of accounting for bad debts. In the past, bad debts have run about 4% of revenues.
Requirements
Pauline must give the banker the following information:
1. How much more or less would net income be for 2018 if Pauline’s Pottery were to use the allowance
method for bad debts? Assume Pauline uses the percent-of-sales method.
2. How much of the receivables balance at the end of 2018 does Pauline’s Pottery actually expect to
collect? (Disregard beginning account balances for the purpose of this question.)
3. Explain why net income is more or less using the allowance method versus the direct write-off
method for uncollectibles.
SOLUTION
Requirement 1
Requirement 2
Fraud Case 8-1
Dylan worked for a propane gas distributor as an accounting clerk in a small Midwestern town. Last
winter, his brother Mike lost his job at the machine plant. By January, temperatures were sub-zero, and
Mike had run out of money. Dylan saw that Mike’s account was overdue, and he knew Mike needed
another delivery to heat his home. He decided to credit Mike’s account and debit the balance to the parts
inventory because he knew the parts manager, the owner’s son, was incompetent and would never notice
the extra entry. Months went by, and Dylan repeated the process until an auditor ran across the charges
by chance. When the owner fired Dylan, he said, “If you had only come to me and told me about Mike’s
situation, we could have worked something out.”
Requirements
1. What can a business like this do to prevent employee fraud of this kind?
2. What effect would Dylan’s actions have on the balance sheet? The income statement?
3. How much discretion does a business have with regard to accommodating hardship situations?
SOLUTION
Financial Statement Case 8-1
Use Target Corporation’s Fiscal 2015 Annual Report and the Note 9 data on “Credit Card Receivables
Transaction” to answer the following questions. Visit http://www.pearsonhighered.com/Horngren to
view a link to Target Corporation’s annual report.
Requirements
1. How much accounts receivable did Target report on its balance sheet as of January 30, 2016? As of
January 31, 2015?
2. Target accepts customer payments via Target brand credit cards. Refer to Note 9, “Credit Card
Receivables Transaction.” How does Target account for these credit card sales?
3. Refer to Note 9. What are the advantages to Target in handling Target brand credit card transactions
as it does? What are Target’s responsibilities concerning these credit cards?
4. Compute Target’s acid-test ratio as of January 30, 2016 and January 31, 2015. Did the ratio improve
or deteriorate? For each date, if all the current liabilities came due immediately, could Target pay
them?
SOLUTION
