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Financial Accounting

OUTLINE
 Review
 Problems

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CLASSIFICATION OF RECEIVABLES
 Accounts receivable:
 short period (30 – 60 days),
 as current assets.
 Notes receivable:
 a formal, written instrument of credit,
 within a year,
 as current assets.
 Other receivables:
 interest receivable, taxes receivable, receivables from employees or
officers, …
 within one year => current assets; beyond one year => investments.

UNCOLLECTIBLE RECEIVABLES
 Bad debt expense: the operating expense recorded from uncollectible
receivables. (uncollectible accounts expense, doubtful accounts expense)
 An account may be uncollectible include the following:
 The receivable is past due.
 The customer doesn’t respond to the company’s attempts to collect.
 The customer files for bankruptcy.
 The customer closes its business.
 The company can’t locate the customer.

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UNCOLLECTIBLE RECEIVABLES
 The two methods of accounting for uncollectible receivables are as follows:
 The direct write-off method records bad debt expense only when an
accounting is determined to be worthless – used by small companies and
companies with few receivables.
 The allowance method records bad debt expense by estimating
uncollectible accounts at the end of the accounting period – used by
companies with a large amount of receivables.

DIRECT WRITE-OFF METHOD

 When the customer’s account (ABC Co.) is determined to be worthless:
Dr. Bad Debt Expense
Cr. Accounts Receivable – ABC Co.
 When the account receivable that has been written off may be collected
later:
 Dr. Accounts Receivable – ABC Co.
Cr. Bad Debt Expense
 Dr. Cash
Cr. Accounts Receivable – ABC Co.

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ALLOWANCE METHOD
 When the company estimates the amount of money of accounts receivable
will be uncollectible, using a contra asset account – Allowance for
Doubtful accounts, not specific accounts.
Dr. Bad Debt Expense
Cr. Allowance for Doubtful Accounts
=> Uncollectible accounts estimate.
=> The adjusting entry reduces receivables to their net realizable value and matches
the uncollectible expense with revenues.
* The Net realizable value of the receivables is the amount that is expected
to be collected.

ALLOWANCE METHOD
 When a customer’s account is identified as uncollectible => write off, using
specific accounts.
Dr. Allowance for Doubtful Accounts
Cr. Accounts Receivable – ABC Co.

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ALLOWANCE METHOD
 When a customer’s account is identified as uncollectible => write off, using
specific accounts.
Dr. Allowance for Doubtful Accounts
Cr. Accounts Receivable – ABC Co.
 At the end of the period, the allowance account will have:
 A credit balance if the write offs during the period are less than the beginning
balance (the amount estimated).
 A debit balance if the write offs during the period exceed the beginning
balance (the amount estimated).

ALLOWANCE METHOD
 When the account receivable that has been written off may be collected
later:
 Dr. Accounts Receivable – ABC Co.
Cr. Allowance for Doubtful Accounts
 Dr. Cash
Cr. Accounts Receivable – ABC Co.

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ALLOWANCE METHOD
 The two methods used to estimate uncollectible accounts:
 Percent of Sales Method: The estimate based on sales is added to any
balance in Allowance for Doubtful Accounts.
Bad Debt Expense = Credit Sales × Bad Debt as a % of Credit Sales
 Analysis of Receivables Method: Based on the assumption that the longer an
account receivable is outstanding, the less likely that it will be collected.
The estimate based on receivables is compared to the balance in the
allowance account to determine the amount of the adjusting entry.

ALLOWANCE METHOD
 Determine the due day of each account receivable.
 Determine the number of days each account is past due (the number of days between the due day and the
date of analysis).
 Each account is placed in an aged class according to its days past due:
+ Not past due
+ 1-30 days past due
+ 31-60 days past due
+ 61-90 days past due
+ 91-180 days past due
+ 181-365 days past due
+ Over 365 days past due
 Determine the totals for each aged class.
 The total for each aged class is multiplied by an estimated percentage of uncollectible accounts for that
class.
 The estimated total of uncollectible accounts is determined as the sum of the uncollectible accounts for each
aged class.

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COMPARISONS

COMPARISONS

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NOTES RECEIVABLE

NOTES RECEIVABLE
 When a company receives a promissory note from a customer to replace
an account receivable:
Dr. Note Receivable – ABC Co.
Cr. Accounts Receivable – ABC Co.
 At the due date, the company records the full payment of the customer
(face amount + interest).
Dr. Cash
Cr. Notes Receivable – ABC Co.
Cr. Interest Revenue

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NOTES RECEIVABLE
 At the due date, the customer fails to pay the note, the company transfers the
face amount and interest of the note back to the account receivable:
Dr. Accounts Receivable – ABC Co.
Cr. Note Receivable – ABC Co.
Cr. Interest Revenue
 Notes:
- If the maker of a note fails to pay the note on the due date, the note is a
dishonored note receivable.
- Interest revenue is reported in the other income section of the Income Statement.
- If the account receivable is uncollectible, the company will write-off (face amount
+ interest).

PROBLEM 9-1B/PAGE 434

1. Record the January 1 credit balance of $15,500 in a T account for
Allowance for Doubtful Accounts

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PROBLEM 9-1B/PAGE 434

2. Journalize the transactions. Post each entry that affects the following
selected T accounts and determine the new balances:
- Allowance for Doubtful Accounts
- Bad Debt Expense

PROBLEM 9-1B/PAGE 434

Feb. 24. Received 40% of the $18,000 balance owed by Broudy Co., a
bankrupt business, and wrote off the remainder as uncollectible.

Dr. Cash 7,200 (40% x 18,000)

Dr. Allowance for Doubtful Accounts 10,800
Cr. Accounts Receivable – Broudy Co. 18,000

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PROBLEM 9-1B/PAGE 434

May 3. Reinstated the account of Irma Alonso, which has been written off in
the preceding year as uncollectible. Journalized the receipt of $1,725 cash in
full payment of Alonso’s account.

 Dr. Accounts Receivable – Irma Alonso 1,725

Cr. Allowance for DA 1,725
 Dr. Cash 1,725
Cr. Accounts Receivable – Irma Alonso 1,725

PROBLEM 9-1B/PAGE 434

Aug. 9. Wrote off the $3,600 balance owed by Tux Time Co., which has no
assets.

Dr. Allowance for DA 3,600

Cr. Accounts Receivable – Tux Time Co. 3,600

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PROBLEM 9-1B/PAGE 434

Nov. 20. Reinstated the account of Pexis Co., which had been written off in
the preceding year as uncollectible. Journalized the receipt of $6,140 cash in
full payment of the account.

 Dr. Accounts Receivable – Pexis Co. 6,140

Cr. Allowance for DA 6,140
 Dr. Cash 6,140
Cr. Accounts Receivable – Pexis Co. 6,140

PROBLEM 9-1B/PAGE 434

Dec. 31. Wrote off the following accounts as uncollectible (compound entry):
Siena Co., $2,400; Kommers Co., $1,800; Butte Distributiors, $6,000; Ed
Ballantyne, $1,750.

Dr. Allowance for DA 11,950

Cr. Accounts Receivable – Siena Co. 2,400
Cr. Accounts Receivable – Kommers Co. 1,800
Cr. Accounts Receivable – Butte Distributors 6,000
Cr. Accounts Receivable – Ed Ballantyne 1,750

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PROBLEM 9-1B/PAGE 434

Dec. 31. Based on an analysis of the $768,375 of accounts receivable, it was
estimated that $18,000 will be uncollectible. Journalized the adjusting entry.

PROBLEM 9-1B/PAGE 434

Dec. 31. Based on an analysis of the $768,375 of accounts receivable, it was
estimated that $18,000 will be uncollectible. Journalized the adjusting entry.

=> The adjusted balance is given, $18,000 => Find the amount of adjusting
entry (Based on T accounts of Allowance for Doubtful Accounts)
18,000 = X – 2,985 => X = 20,985

Dr. Bad Debt Expense 20,985

Cr. Allowance for DA 20,985
=> The adjusting entry

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PROBLEM 9-1B/PAGE 434

3. Determine the expected net realizable value of the accounts receivable as
of Dec. 31.

$750,375 ($768,375 – $18,000)

PROBLEM 9-1B/PAGE 434

4. Assuming that instead of basing the provision for uncollectible accounts
on an analysis of receivables, the adjusting entry on Dec. 31 had been based
on an estimated expense of ½ of 1% of the net sales of $4,100,000 for the
year, determine the following:
a. Bad debt expense for the year: $20,500 ($4,100,000 × 0.005)

Dr. Bad Debt Expense 20,500

Cr. Allowance for DA 20,500
=> The adjusting entry

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PROBLEM 9-1B/PAGE 434

b. Balance in the allowance account after the adjustment of Dec. 31:
$17,515 ($20,500 – $2,985)
The amount of adjusting entry is given (from question a)
=> Find the adjusted
balance
Y = 20,500 – 2,985
Y = 17,515

PROBLEM 9-1B/PAGE 434

c. Expected net realizable value of the accounts receivable as of Dec. 31

$750,860 ($768,375 – $17,515)

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