Receivables_Practice_Problem_2_with_Solution

Receivables_Practice_Problem_2_with_Solution - Solution A....

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ACCT 301 Thurber, Inc. has the following information: Accounts Receivable, 1/1/04 $ 2,880,000 Allowance for Uncollectibles, 1/1/04 $ 85,500 Credit Sales Revenue, 2004 $11,880,000 Collections, 2004 $10,674,000 Write-offs of Accounts Receivable, 2004 $ 349,500 A. Record the write-off of uncollectibles. B.1 Assuming that uncollectibles are estimated as 3.25% of credit sales, record any necessary adjusting entry as of 12/31/04. B2. Assuming that uncollectibles are estimated to be 3.75% of ending accounts receivable, record any necessary adjusting entry as of 12/31/04. C. All of the above numbers are gross numbers. Suppose that Ninja, Inc. offered a 3% cash discount on credit sales if paid within 20 days of the invoice and that Gross Collections were $10,674,000 but actual cash collections were $10,377,000. Assuming that uncollectibles are estimated to be 3.25% of credit sales, what would be the difference in Net Income in 2004 between using the Gross Price Method for cash discounts and using the Net Price Method?
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Unformatted text preview: Solution A. Allowance for Uncollectibles $349,500 Accounts Receivable $349,500 B.1. Bad Debt Expense $386,100 = $11,880,000 @ 3.25% Allowance for Uncollectibles $386,100 B.2. Bad Debt Expense $404,119 Allowance for Uncollectibles $404,119 Balance in A/R $2,880,000 + $11,880,000 - $10,674,000 - $349,500 = $3,736,500 Required Balance in Allowance Account $3,736,500 @ 3.75% = $140,119 Credit Current Balance $85,500 - $349,500 $264,000 Debit Required Adjustment $404,119 C. Gross Price Method Net Price Method Sales Revenue $11,880,000 @ 97% = $11,523,600 Bad Debt Expense ($ 386,100) ($ 374,517) Cash Discounts Taken (1) ($ 297,000) Cash Discounts Not Taken (2) $ 23,220 Net Effect on Income $11,196,900 $11,172,303 Difference = $11,196,900 - $11,172,303 = $24,597 (1) Gross Collections Actual Collections = $10,674,000 - $10,377,000 = $297,000 (2) Actual Collections Net Price = $10,377,000 ($10,674,000 @ 97%) = $23,220...
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