Question

Bad debts -Direct Write-off and Allowance Methods -

EchoGnomics is a wholesaler of garden figurines, selling mainly to independent gardening shops in Australia. All sales are conducted on a 30-day credit basis and no early payment or cash discounts are given. The following information has been extracted from the accounting records as at 30 June 2020.

Sales $874 000 , Sales Returns & Allowances 45 600 , Cash Collected ($549 600 + GST 10%) 604 560 , Bad Debts to be written off 6 952 , Accounts Receivable written off ($6 952 + GST10%) 7 647 GST Payable/ Collections (874 000 -$45 600) x 10% = 82 840

Required:

A. Assuming that EchoGnomics uses the direct write-off method of accounting for bad debts:

1. Show the general journal entry required to write-off method of accounting for bad debts.

2. What amount would be shown for bad debts expense in the income statement at 30June 2020?

3. What amount would beshown for accounts receivable in the balance sheet at 30 June2020?

B. Assuming that EchoGnomics uses the allowance method for accounting for bad debts and the following information was found after examination of the accounts:

i] Allowance for doubtful debts (1 July 2019)$7 920 Cr . ii] Allowance calculated based on 1% of net credit sales for the year

1. Show the general journal entries required to write off the bad debts and recognise the required allowance for doubtful debts.

2. What amount would be shown for bad debts expense in the income statement at 30 June 2020?

3. What amount would be shown for accounts receivable in the balance sheet at 30 June 2020?

Answer 1

Part A Direct write-off method of Accounting for bad debts :

1. In the books of Echo Gnomics

Journal Entries

Part B: Allowance Method

In the Books of Eco Gnomics

Joiurnal Entries for Bad Debts and Allowance

Working Note :

Credit Sales = $874000

Less Sales Return = $45600

Net Credit Sales = $ 828400

Allowance 1 % 0f net credit sales = 828400 X 1/100 = $ 8284