Wigs Plus Company supplies wigs and hair care products to beauty salons throughout California and the Pacific Northwest. The accounts receivable clerk for Wigs Plus prepared an aging-of-receivables schedule as of the end of business on December 31, 2010 shown in the Excel template. Wigs Plus Company has a past history of uncollectible accounts by age category, as follows: Not past due - 2% uncollectible 1 -30 days past due - 4% uncollectible 31 -60 days past due - 10% uncollectible 61 -90 days past due - 15% uncollectible 91 -120 days past due - 35% uncollectible Over 120 days past due - 80% uncollectible
1. Estimate the allowance for doubtful accounts, based on the aging-of-receivables schedule.
2. Assume that the allowance for doubtful accounts for Wigs Plus Company has a negative balance of $1,710 before adjustment on December 31, 2010. Illustrate the effect on the accounts and financial statements of the adjustment for uncollectible accounts.
3. Wigs Plus Company reported credit sales of $4,000,000 during 2010. Assume that instead of using the analysis of receivables method of estimating uncollectible accounts, Wigs Plus Company uses the percent of sales method and estimates that 1.75% of sales will be uncollectible. Illustrate the effect on the accounts and financial statements of the adjustment for uncollectible accounts using the percent of sales method.
4. Assume that on February 10, 2011, Wigs Plus wrote off the $3,500 account of Lasting Images as uncollectible. Illustrate the effect on the accounts and financial statements of the write-off of the Lasting Images account.
5. Assume that on May 17, 2011, Lasting Images paid $3,500 on its account. Illustrate the effect on the accounts and financial statements of reinstating and collecting the Lasting Images account.
6. Assume that instead of using the allowance method, Wigs Plus uses the direct write-off method. Illustrate the effect on the accounts and financial statements of the following:
a. The write-off of the Lasting Images account on February 10, 2011.
b. The reinstatement and collection of the Lasting Images account on May 17, 2011.
7. Does Amazon.com use the direct write-off or allowance method of accounting for uncollectible accounts receivable? Explain.