• Sales on account, $540,000. Ignore Cost of Goods Sold — August 2016 Lily Floral Supply had 145 debit balance Accounts Receivable and

On August 31, 2016, Lily Floral Supply had a $145,000 debit balance in Accounts Receivable and a $5,800 credit balance in Allowance for Bad Debts. During September, Lily made

• Sales on account, $540,000. Ignore Cost of Goods Sold.

• Collections on account, $581,000.

• Write-offs of uncollectible receivables, $5,000.

Requirements

1. Journalize all September entries using the allowance method. Bad debts expense was estimated at 1 % of credit sales. Show all September activity in Accounts Receivable, Allowance for Bad Debts, and Bad Debts Expense (post to these T-accounts).

2. Using the same facts, assume that Lily used the direct write-off method to account for uncollectible receivables. Journalize all September entries using the direct write-off method. Post to Accounts Receivable and Bad Debts Expense, and show their balances at September 30, 2016.

3. What amount of Bad Debts Expense would Lily report on its September income statement under each of the two methods? Which amount better matches expense with revenue? Give your reason.

4. What amount of net accounts receivable would Lily report on its September 30,

2016, balance sheet under each of the two methods? Which amount is more realistic? Give your reason.

SOLUTION

Requirement 1