Determining Bad Debt Expense Based on Aging Analysis and Interpreting Ratios
IceKreme Inc. makes ice cream machines for sale to ice cream parlours. The following events occurred between April 1 and June 30, 2014:
| 10-Apr |
Received an order from Peter's Appliances, a wholesaler, for 10 machines. |
| 30-Apr |
Sold 15 machines to Yuri Inc. on credit. |
| 1-May |
The purchasing manager of Peter's Appliances visited IceKreme's factory and purchased 12 machines instead of the 10 machines that were previously ordered. |
| 5-May |
Yuri Inc. paid for the machines purchased on April 30. |
| 7-May |
Sold 10 machines to Cheng Ltd. on credit. |
| 10-May |
Wrote off $12,000 of trade receivables that were considered uncollectible. These receivables relate to sales made prior to April 1, 2014. |
| 15-May |
Peter's Appliances returned two defective machines and paid the amount due. |
| 1-Jun |
Received $80,000 from Cheng Ltd. on account. |
| 30-Jun |
Recovered $3,000 from the receivables that were written off on May 10. |
Additional information is as follows:
- IceKreme sold all machines at $10,000 per unit.
- All of IceKreme's sales were on credit with terms 2/10, n/30.
- IceKreme's records included the following items and their balances as at March 31, 2014:
| Trade receivables |
$60,000 |
| Allowance of doubtful accounts (credit balance) |
15,000 |
| Netsales |
600,000 |
Required:
1. Prepare the journal entries to record the transactions that occurred from April 1 to June 30,2014.
2. The company uses the aging of trade receivables method to determine the amount of bad debt expense. The estimated uncollectible rates for the various age groups are as follows:
Age of trade receivables
|
Not yet due 1-30 days past due
actible 5% 10%
|
|
31-60 days past due Over 60 days past due
15% 20%
|
|
|
Determine the amount of receivables that may not be collectible in the future, and prepare the journal entry to record bad debt expense at June 30, 2014, the company's fiscal year-end.
(Hint Use a time line to keep track of trade receivables in order to determine the age of these receivables.)