The Links Company Uses the Percent of Sales Method of Accounting

question 56

Essay

The Links Company uses the percent of sales method of accounting for uncollectible accounts receivable. During the current year, the following transactions occurred:
Sept 7 Links Company determined that the $8,000 account receivable of the Rainier Company was uncollectible, and wrote it off.
Oct 15 Links Company determined that the $3,500 account receivable of the Olympic Company was uncollectible and wrote it off.
Nov 9 Rainier Company paid $6,000 of the amount owed to the Links
Company. Links Company does not expect further collections from the Rainier Company.
Dec 31 Links Company estimates that 1% of its $1,900,000 of credit sales would be uncollectible.
1. Prepare the general journal entries to record these transactions.
2. If the balance of the allowance for uncollectible accounts was a $4,000 credit on January 1 of the current year, determine the balance of the allowance for uncollectible accounts at December 31 of the current year. Assume that the transactions above are the only transactions affecting the allowance for uncollectible accounts during the year.

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Definitions:

Binomial Model

A mathematical model used in finance to estimate the price of options by considering two potential outcomes for an asset's price (up and down) over time.

Risk Free Interest Rate

The rate of return on an investment with zero risk of financial loss, typically based on government bonds.

Exercise Price

The price at which the underlying security can be purchased (call option) or sold (put option) when exercising an option contract, synonymous with striking price.

European Put Option

A type of put option that can only be exercised at its expiration date, not before, contrasting with American options which can be exercised at any time before expiry.