Chapter 8, Problem 1COP

Recording and Reporting Credit Sales and Bad Debts Using the Aging of Accounts Receivable Method (Chapters 6 and 8)

Okay Optical. Inc. (OOI), began operations in January, selling inexpensive sunglasses to large retailers like Walgreens and other smaller stores. Assume the following transactions occurred during its first six months of operations.

January	1	Sold merchandise to Walgreens for $20,000; the cost of these goods to OOI was $12,000.
February	12	Received payment in full from Walgreens.
March	1	Sold merchandise to Bravis Pharmaco on account for $3,000; the cost of these goods to OOI was $1,400.
April	1	Sold merchandise to Tony’s Pharmacy on account for $8,000. The cost to OOI was $4,400.
May	1	Sold merchandise to Anjuli Stores on account for $2,000; the cost to OOI was $1,200.
June	17	Received $6,500 on account from Tony’s Pharmacy.

Required:

1. 1. Complete the following aged listing of customer accounts at June 30.

  

1. 2. Estimate the Allowance for Doubtful Accounts required at June 30 assuming the following uncollectible rates: one month, 1 percent; two months, 5 percent; three months, 20 percent: more than three months, 40 percent.
2. 3. Show how OOI would report its accounts receivable on its June 30 balance sheet. What amounts would be reported on an income statement prepared for the six-month period ended June 30?
3. 4. Bonus Question: In July, OOI collected the balance due from Bravis Pharmaco but discovered that the balance due from Tony’s Pharmacy needed to be written off. Using this information, determine how accurate OOI was in estimating the Allowance for Doubtful Accounts needed for each of these two customers and in total.