Methods of estimating Uncollectible Accounts and Receivables Analysis

p5. On December 31 of last year, Target System Company’s balance sheet had Accounts Receivable of $298,000 and a credit balance in Allowance for Uncollectible Accounts of $20,300. During the current year, Target System’s records included the following selected activities: (a) sales on account, $1,195,000; (b) sales returns and  allowances,

$73,000; (c) collections from customers, $1,150,000; and (d) accounts written off as worthless, $16,000. In the past, 1.6 percent of Target System’s net sales have been uncollectible.

 

ReQUIReD

1.    Prepare T accounts for Accounts Receivable and Allowance for Uncollectible Accounts. Enter the beginning balances, and show the effects on these accounts of the items listed above, summarizing the year’s activity. Determine the ending bal- ance of each account.

2.    Compute Uncollectible Accounts Expense, determine the ending balance of Allow- ance for Uncollectible Accounts and net Accounts Receivable under (a) the percent- age of net sales method and (b) the accounts receivable aging method. Assume that an aging of the accounts receivable shows that $20,000 may be uncollectible.

3.    Compute the receivables turnover and days’ sales uncollected, using the data from the accounts receivable aging method in requirement 2. (Round to one decimal place or to the nearest whole day.)

4.    aCCounting ConneCtion ▶ How do  you  explain  that  the  two  methods used in requirement 2 result in different amounts for Uncollectible Accounts Expense? What rationale underlies each method?