Cash Discount

Delta Company sold goods to wholesalers on terms 2/10, net 30. The entity has no cash sales but 50% of
the customers took advantage of the discount.

The entity used the gross method of recording sales and accounts receivable.

An analysis of the trade accounts receivable at year-end revealed the following:

Age Amount Collectible

0-15 days 2,000,000 100%
16-30 days 1,400,000 95%
31-60 days 400,000 90%
Over 60 days 200,000 50%
4,000,000

What amount should be reported as allowance for sales discount at year-end?

a. 20,000
b. 32,400
c. 33,500
d. 40,000

Question 1 Answer A

The discount is 2% if accounts are paid in 15 days.

Thus, of the total accounts receivable only the amount of 2,000,000 within the “0-15 days” category is
still subject to cash discounts.

The available discounts is 2% times P2,000,000 or P40,000.

Since, only 50% of the customer took advantage of the discounts, the cash discount to be recognized is
50% of 40,000 or P20,000.

Estimating Doubtful Accounts

Horus Company provided for doubtful account expense monthly at 3% of credit sales. The balance in the
allowance for doubtful accounts was P1,000,000 on January 1, 2019.

During 2019, credit sales totaled P20,000,000, interim provisions for doubtful accounts were made at
3% of credit sales, P200,000 accounts were written off, and recoveries of accounts previously written off
amounted to P50,000.

An aging of accounts receivable was made on December 31,2019.

1-60 days 6,000,000 10% uncollectible
61-180 days 2,000,000 20% uncollectible
181-360 days 1,500,000 30% uncollectible
More than one year 500,000 50% uncollectible
10,000,000

Based on the review of “more than one year” category, additional accounts of 100,000 are to be written
off on December 31, 2019.

What amount should be reported as doubtful account expense for the current year?

a. 2,250,000
b. 1,650,000
c. 900,000
d. 850,000

Answer C.

1-60 days (6,000,000 x 10% ) 600,000

61-180 days (2,000,000 x 20% ) 400,000

181-360 days (1,500,000 x 30% ) 450,000

More than one year (500,000-100,000 x 50%) 200,000

Required allowance- December 31, 2019 1,650,000

Allowance for doubtful accounts- January 1, 2019 1,000,000

Recoveries 50,000

Doubtful account expense (SQUEEZE) 900,000

Total 1,950,000

Accounts written off ( 200,000+ 100,000) (300,000)

Allowance for doubtful accounts- December 31, 2019 1,650,000

The doubtful account expense is “squeezed” by working back from the allowance for doubtful accounts
on December 31, 2019.

From inception of operations, Axis Company carried no allowance for doubtful accounts.

Uncollectible account were expensed as written off and recoveries were credited to income as collected.
During 2020, management recognized that the accounting policy with respect to doubtful account was
not correct and determine that the allowance for doubtful accounts was necessary.

A policy was established to maintain an allowance for doubtful accounts based on historical bad debt
loss percentage applied to year-end accounts receivable.

The historical bad debt loss percentage is to be recomputed each year