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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