Accounting for Cash Discounts, Sales Returns, and Uncollectible

MOD 7 CONCEPT REVIEW QUESTION 1: The gross method of accounting for cash discounts considers a discount not taken as part of sales revenue. The net method considers a discount not taken as sales discount forfeited. On June 13 of the current year, Kensington Factory sold merchandise to a customer for $8,000 with credit terms 2/10, n/30. The customer paid the full amount due on June 20. Kensington uses the gross method of accounting for cash discounts. Prepare the appropriate journal entry dated June 20. The June 20 payment was received within the 10-day discount period, which began on June 13. Discount taken = $8,000 × 2% = $160 Under the gross method, Kensington initially recorded the sales revenue and related accounts receivable at full agreed-upon price of $8,000. Under this method, discounts are recorded when they are taken by the customer. So, on June 20, we record the payment received with a debit to Cash for $7,840 (or $8,000 − $160), a debit to Sales Discounts for $160 (or the amount of the discount taken), and a credit to Accounts Receivable for $8,000. QUESTION 2: When merchandise returns are anticipated, a refund liability should be recorded, and sales revenue should be reduced by anticipated sales returns. At the end of its first year of operations, Loring Industries estimates that sales returns in the amount of $20,000 will occur during Year 2. The cost of the inventory expected to be returned is $12,000. All of Loring's sales are made for cash and the company uses a perpetual inventory system. Assume that no returns have occurred as of the end of Year 1. Prepare the appropriate adjusting journal entry to record the expected sales returns and the inventory expected to be returned in Year 2. Sales Returns$20,000 Refund Liability$20,000 Inventory$12,000 Cost of Goods Sold$12,000 QUESTION 3: At the end of each period, the company estimates the necessary balance in the allowance for uncollectible accounts and then records whatever adjustment to the allowance and corresponding bad debt expense is necessary to reach that balance. Manning Company uses the allowance method. At the end of its first year of operations, the company estimates that it will not collect $2,500 of its accounts receivable. Prepare the appropriate adjusting journal entry to establish the estimate for uncollectible accounts. Bad Debt Expense$12,000 Allowances for Uncollectable Accounts$12,000 QUESTION 4: The balance sheet approach determines bad debt expense by estimating the appropriate carrying value of accounts receivable to be reported in the balance sheet and then adjusting the allowance for uncollectible accounts as necessary to reach that carrying value. The income statement approach estimates bad debt expense based on the notion that a certain percentage of each period's credit sales will prove to be uncollectible.The following summarizes the results of an aging analysis of Glenview Company's accounts receivable at the end of the year. Age GroupAmountEstimated PercentUncollectibleEstimated Allowance 0-30 days$ 420,0002%$ 8,400 31-60 days140,0005%7,000 61-120 days100,00010%10,000 Over 120 days120,00020%24,000 Allowance for uncollectible accounts$ 49,400 The company has a pre-adjustment credit balance of $5,000 in its Allowance for Uncollectible Accounts at December 31, Year 2. Using the balance sheet approach, what amount of Bad Debt Expense should Glenview report for Year 2? Allowance for Uncollectible Accounts DebitCredit 5,000Pre-adjustment balance 44,400Bad debt expense 49,400Post-adjustment balance QUESTION 5: The balance sheet approach determines bad debt expense by estimating the appropriate carrying value of accounts receivable to be reported in the balance sheet and then adjusting the allowance for uncollectible accounts as necessary to reach that carrying value. The income statement approach estimates bad debt expense based on the notion that a certain percentage of each period's credit sales will prove to be uncollectible. Rode Company estimates bad debt expense at 1% of credit sales. The company reported accounts receivable of $100,000 and a pre- adjustment credit balance in its allowance for uncollectible accounts account of $2,000 at the end of the current year. During the current year, Rode's credit sales were $2,000,000. What is the amount of the company's bad debt expense for the current year? Bad debt expense = Sales × Estimated percentage uncollectibleBad debt expense = $2,000,000 × 1% = $20,000We do not consider the pre-adjustment balance in the allowance for uncollectible accounts when using the income statement method.