Hernandez Company had an Accounts Receivable balance of $640,000 and a credit balance in Allowance for Uncollectible Accounts of $33,400 at January 1, 2011. During the year, Hernandez recorded the following transactions:
• Sales on account, $2,104,000
• Sales returns and allowances by credit customers, $106,800
• Collections from customers, $1,986,000
• Worthless accounts written off, $39,600
The company’s past history indicates that 2.5 percent of its net credit sales will not be collected.
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 balance of each account.
2. Compute the amount of uncollectible accounts expense, and determine the ending balance of Allowance for Uncollectible Accounts under
(a) The percentage of net sales method
(b) The accounts receivable aging method, assuming an aging of the accounts receivable shows that $48,000 may be uncollectible.
3. Compute the receivable turnover and days’ sales uncollected, using the data from the accounts receivable aging method in requirement 2. (Round to one decimal place.)
4. 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?