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Methods for Accruing Bad Debts and Uncollectible Accounts

Inc. reported the following amounts shortly before it made its year-end adjustments at June 30, 2005:

Sales $425,000
Sales Returns and Allowances 9,000
Cash Discounts 5,000
Accounts Receivable 43,000
Allowance for Doubtful Accounts 760 (Credit balance)

Answer each of the following independent questions concerning Cast, Inc.:

1. How do you know that Cast uses the allowance method?

2. If Cast estimates that uncollectible accounts will be 1% of net sales, prepare the adjusting entry.

3. If Cast estimates that uncollectible accounts will be 8% of gross accounts receivable, prepare the adjusting entry.

4. Assume that the $760 balance in the Allowance account is now a debit balance.
a. Prepare the adjusting entry using the 1% of net sales approach.

b. Prepare the adjusting entry using the 8% of gross accounts receivable approach.

Solution Preview

I attached my responses so I could create a T acct for you so you can see what I did and how this all works!

Inc. reported the following amounts shortly before it made its year-end adjustments at June 30, 2005:

Sales $425,000
Sales Returns and Allowances 9,000
Cash Discounts 5,000
Accounts Receivable 43,000
Allowance for Doubtful Accounts 760 (Credit balance)

Answer ...

Solution Summary

Solution discusses the two methods for providing for bad debts and gives solution in T account format for easy visualization of the adjusting entry needed.

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