M&N Ltd sells security doors. Majority of its sales are on credit except small amount of cash
sales each year. The accounting records at 30 June 2019 reveal the following. Ignore GST.
Please see image for clear info
Credit sales (for the year of 2019) $2,100,000
Cash sales (for the year of 2019) 20,000
Credit sales returns and allowances (for the year of 2019) 80,000
Accounts receivable (balance at 30 June 2019) 593,000
Allowance for doubtful debts (credit balance at 30 June 2019) 2,800
The company’s yearly bad debts expense had been estimated at 2.5% of net credit sales revenue in
the past. The management of M&N Ltd has decided to compare the current method with an
ageing of accounts receivable method. The following analysis was obtained with respect to the
accounts receivable.
.
Balance % of estimated uncollectable (Please see image for clear info)
Accounts not yet due $351,200 1
Accounts overdue 10 - 30 days 92,000 3
31 - 60 days 78,000 10
61 - 120 days 40,800 30
121 days and over 31,000 60
Total 593,000
Required:
a) Prepare the journal entries to adjust the Allowance for Doubtful Debts at 30 June 2019 under the
following two methods.
i. the net credit sales method
ii. the ageing of accounts receivable method.
b) Prepare ledger account for the Allowance for Doubtful Debts account under both methods
mentioned in a), using running balance format.
c) Assume that the allowance account had a debit balance of $980 at 30 June 2018, determine the
bad debt expense for the year and the balance in the allowance account under ageing method.
d) Explain, with reference to your calculation, why the two different methods result in different
balances
Extracted text: Balance % of estimated uncollectable Accounts not yet due $351,200 1 10 - 30 days 31 - 60 days 61 - 120 days 121 days and over Accounts overdue 92,000 3 78,000 10 40,800 30 31,000 593,000 60 Total
Extracted text: Credit sales (for the year of 2019) $2,100,000 Cash sales (for the year of 2019) Credit sales returns and allowances (for the year of 2019) 20,000 80,000 Accounts receivable (balance at 30 June 2019) Allowance for doubtful debts (credit balance at 30 June 2019) 593,000 2,800