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Question(s) / Instruction(s):

A)  During its first year of operations, Spring Break Travel earned revenue of $500,000 on account.  Industry experience suggests that Spring Break’s bad debts will amount to 2% of revenues.  As of December 31, 2010, accounts receivable total $90,000.  The company uses the allowance method to account for doubtful accounts.

 

Required:

 

1)     Show in good form the journal entry to record Spring Break’s bad debt expense for their first year using the percent of sales allowance method (see pages 298 - 299).

2)     Show how Spring Break would report accounts receivable, the allowance for doubtful accounts, and net receivables on its year ending balance sheet.  (See page 297 Exhibit 7.6 for format)

 

B)  Hot Button.com Inc. also uses the allowance method and had the following balances in four selected general ledger accounts as of December 31, 2010, before any year end adjustments:

 

Selected General Ledger Accounts:                           Debit               Credit

 

Accounts Receivable                                                  104,000          

Allowance for Uncollectible Accounts                                                   1,300

Sales                                                                                            1,100,000

Bad Debt Expense                                                        0

 

An aging of the accounts receivable shows:

 

                                        0-30 days        31-60 days      61-90 days      Over 90 days

Accounts Receivable              $70,000           $20,000           $10,000           $4,000

Historical % Uncollectible          1%                   2%                   5%                   50%

 

Required:

 

1)     Show in good form the journal entry to record Hot Button’s bad debt expense for 2010 using the aging of accounts receivable allowance method.  (see pages 300-301 and Exhibits 7.11 and 7.12)

2)     Show the balances in the same four selected general ledger accounts as above after your journal entries have been posted.

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