InvisiGuard 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.
|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 InvisiGuard 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|
|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|
- Prepare the journal entries to adjust the Allowance for Doubtful Debts at 30 June 2019 under the following two methods.
- the net credit sales method
- the ageing of accounts receivable method.
- Prepare ledger account for the Allowance for Doubtful Debts account under both methods mentioned in a), using running balance format.
- 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.
- Explain, with reference to your calculation, why the two different methods result in different balances.
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