Aging Method and Net Sales Method Contrasted E5B. Accounting Connection During 2
ID: 2567328 • Letter: A
Question
Aging Method and Net Sales Method Contrasted
E5B. Accounting Connection During 2014, SABA Company had net sales of
$11,400,000. Most of the sales were on credit. At the end of 2014, the balance of
Accounts Receivable was $1,400,000 and Allowance for Uncollectible Accounts had
a debit balance of $48,000. SABA Company’s management uses two methods of estimating
uncollectible accounts expense: the percentage of net sales method and the
accounts receivable aging method. The percentage of uncollectible sales is 1.5 percent
of net sales, and based on an aging of accounts receivable, the end-of-year uncollectible
accounts total $140,000.
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Chapter Assignments 1
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Not For Sale 2 Chapter 8: Receivables
Prepare the year-end adjusting entry to record the uncollectible accounts expense
under each method. What will the balance of Allowance for Uncollectible Accounts be
after each adjustment? Why are the results different? Which method is likely to be more
reliable? Why
Explanation / Answer
Percentage of net sales method:
Balance in Allowance for uncollectible accounts: $123000
$171000 - $48000 = $123000
Accounts receivable aging method:
Balance in Allowance for uncollectible accounts: $140000
The results under both the methods are different because under the percentage of net sales method, the existing balance in the allowance for uncollectible accounts is not considered while recording the uncollectible accounts expense for the period while under the accounts receivable aging method, the allowance for uncollectible accounts is estimated based on an aging analysis of the accounts receivable balances and the uncollectible accounts expense is then calculated as a balancing amount after considering the beginning and ending balances in the allowance for uncollectible accounts.
The accounts receivable aging method is likely to be more reliable since it estimates the allowance for uncollectible accounts based on the actual accounts receivable balances that are outstanding and past due.
General Journal Debit Credit Uncollectible accounts expense 171000 Allowance for uncollectible accounts 171000 (1.5% x $11,400,000) (To record uncollectible accounts expense)