InvisiGuard Ltd sells security doors. Majority of its sales are on credit except small amount of cash sales each year. The accounting records at 30 June 2019 reveal the following. Ignore GST. Credit sales (for the year of 2019) $2,100,000 Cash sales (for the year of 2019) 20,000 Credit sales returns and allowances (for the year of 2019) 80,000 Accounts receivable (balance at 30 June 2019) 593,000 Allowance for doubtful debts (credit balance at 30 June 2019) 2,800 The company’s yearly bad debts expense had been estimated at 2.5% of net credit sales revenue in the past. The management of InvisiGuard Ltd has decided to compare the current method with an ageing of accounts receivable method. The following analysis was obtained with respect to the accounts receivable. Balance % of estimated uncollectable Accounts not yet due $351,200 1 Accounts overdue 10 - 30 days 92,000 3 31 - 60 days 78,000 10 61 - 120 days 40,800 30 121 days and over 31,000 60 Total 593,000 Required Prepare ledger account for the Allowance for Doubtful Debts account under both methods mentioned in a), using running balance format. Assume that the allowance account had a debit balance of $980 at 30 June 2018, determine the bad debt expense for the year and the balance in the allowance account under ageing method. Explain, with reference to your calculation, why the two different methods result in different balances.

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter5: Sales And Receivables

Section: Chapter Questions

Problem 47BE: Percentage of Credit Sales Method Ruby Red manufactures, markets, and distributes citrus flavored...

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InvisiGuard Ltd sells security doors. Majority of its sales are on credit except small amount of cash sales each year. The accounting records at 30 June 2019 reveal the following. Ignore GST.

Credit sales (for the year of 2019)	$2,100,000
Cash sales (for the year of 2019)	20,000
Credit sales returns and allowances (for the year of 2019)	80,000
Accounts receivable (balance at 30 June 2019)	593,000
Allowance for doubtful debts (credit balance at 30 June 2019)	2,800

The company’s yearly bad debts expense had been estimated at 2.5% of net credit sales revenue in the past. The management of InvisiGuard Ltd has decided to compare the current method with an ageing of accounts receivable method. The following analysis was obtained with respect to the accounts receivable.

		Balance	% of estimated uncollectable
Accounts not yet due		$351,200	1
Accounts overdue	10 - 30 days	92,000	3
	31 - 60 days	78,000	10
	61 - 120 days	40,800	30
	121 days and over	31,000	60
Total		593,000

Required

Prepare ledger account for the Allowance for Doubtful Debts account under both methods mentioned in a), using running balance format.
Assume that the allowance account had a debit balance of $980 at 30 June 2018, determine the bad debt expense for the year and the balance in the allowance account under ageing method.
Explain, with reference to your calculation, why the two different methods result in different balances.

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