Final answer:
The student must apply a percentage to estimate uncollectible accounts for Pharaoh company and calculate the portion of deposits Humongous Bank can loan out after holding the required reserves. A T-account for the bank would show $1 million in reserves and $19 million in loans.
Step-by-step explanation:
The student's question relates to the estimation of uncollectible accounts using the percentage of receivables basis. Pharaoh company has current accounts receivable totaling $168,800 and an existing allowance for doubtful accounts with a credit balance of $2,080.
When a company uses the percentage of receivables method, it estimates the uncollectible accounts by applying a certain percentage deemed appropriate for the level of risk associated with accounts receivable. This percentage is typically based on historical data and industry standards.
To complete the estimate, the calculated amount based on the percentage expected to be uncollectible is then adjusted by the existing allowance for doubtful accounts balance. However, the exact percentage to be used is not provided; therefore, a specific estimate cannot be given without that critical information.
For Humongous Bank, if they are required to hold 5% of their $20 million in reserves, they would need to hold $1 million ($20 million x 5%).
The rest, which is $19 million ($20 million - $1 million), can be loaned out.
A T-account representation for the bank after the first round of loans can be drawn with 'Reserves' on one side showing $1 million and 'Loans' on the other side showing $19 million.