Question

Presented below is information related to Cheyenne Corp., which sells merchandise with terms 2/10, net 60. Cheyenne Corp. records its sales and receivables net. July 1 Cheyenne Corp. sold to Warren Harding Co. merchandise having a sales price of $17,000. 5 Accounts receivable of $14,800 (gross) are factored with Andrew Jackson Credit Corp. without recourse at a financing charge of 8%. Cash is received for the proceeds; collections are handled by the finance company. (These accounts were all past the discount period.) 9 Specific accounts receivable of $14,800 (gross) are pledged to Alf Landon Credit Corp. as security for a loan of $6,300 at a finance charge of 7% of the amount of the loan. The finance company will make the collections. (All the accounts receivable are past the discount period.) Dec. 29 Warren Harding Co. notifies Cheyenne that it is bankrupt and will pay only 20% of its account. Give the entry to write off the uncollectible balance using the allowance method. (Note: First record the increase in the receivable on July 11 when the discount period passed.)

Answer 1

To write off the uncollectible balance using the allowance method for Cheyenne Corp. after Warren Harding Co.'s bankruptcy notification, the required journal entries would involve debiting Cash for the partial payment, a debit to Loss on Uncollectible Account, and crediting both Accounts Receivable and Allowance for Doubtful Accounts.

Step-by-step explanation:

On July 1, Cheyenne Corp. sold merchandise to Warren Harding Co. with terms 2/10, net 60, meaning that Warren Harding Co. could get a 2% discount if they paid within 10 days. However, the discount period has passed, so on July 11, Cheyenne Corp. should recognize the full receivable amount of $17,000.

On December 29, Warren Harding Co. declared bankruptcy and agreed to pay only 20% of the $17,000, which amounts to $3,400. To write off the uncollectible balance using the allowance method, Cheyenne Corp. should make the following entries:

• Cash: Debit $3,400 (20% of the receivable)
• Loss on Uncollectible Account: Debit $13,600 (the uncollectible balance)
• Allowance for Doubtful Accounts: Credit $13,600
• Accounts Receivable: Credit $17,000

These entries remove the uncollectible balance from Accounts Receivable and recognize the loss in the income statement while adjusting the Allowance for Doubtful Accounts.

Answer 2

Detailed solution is given in the tabular form below: