financial accounting tools for business decision making 6e solution manual chapter 8

Three types of receivables along with examples follows: a Type b Examples 1 Accounts receivable Accounts receivable from trade customers 2 Notes receivable Notes receivables from trade

CHAPTER 8

Reporting and Analyzing Receivables

ASSIGNMENT CLASSIFICATION TABLE

Study Objectives Questions

Brief Exercises Exercises

A Problems

B Problems BYP

1B, 2B, 3B, 4B, 5B, 8B

ASSIGNMENT CHARACTERISTICS TABLE

Problem

Difficulty Level

Time Allotted (min.)

1A Record receivables and bad debts transactions;

show statement presentation

Moderate 25-35

2A Record receivables and bad debts; show statement

presentation

Moderate 25-35

3A Determine missing amounts Complex 15-20

4A Prepare aging schedule and record bad debts Moderate 20-30

5A Prepare aging schedule; record bad debts for two

years

Moderate 25-35

6A Record receivables transactions Moderate 20-30

7A Record notes receivable and payable transactions Moderate 20-30

8A Record notes receivable transactions; show

2B Record receivables and bad debts; show statement

presentation

Moderate 25-35

3B Determine missing amounts Complex 15-20

4B Prepare aging schedule and record bad debts Moderate 20-30

5B Prepare aging schedule, record bad debts for two

years

Moderate 25-35

ASSIGNMENT CHARACTERISTICS TABLE (Continued)

Problem

Difficulty Level

Time Allotted (min.) 6B Record receivables transactions Moderate 20-30

7B Record notes receivable and payable transactions Moderate 20-30

8B Record notes receivable transactions; show

ANSWERS TO QUESTIONS

1 Three types of receivables along with examples follows:

(a) Type (b) Examples

(1) Accounts receivable Accounts receivable from trade customers

(2) Notes receivable Notes receivables from trade customers

Notes receivable obtained when selling property

(3) Other receivables Interest receivable, loans to company officers, advances to

employees, sales tax recoverable, and income tax receivable

2 Trade receivables are the result of sales transactions while nontrade receivables are the result of transactions other than sales transactions of the business, such as interest receivable, income tax receivable, and similar types of receivables

3 (a) For a service company, a receivable is recorded when service is provided on

account as required by the revenue recognition criteria For a merchandising company, a receivable is recorded at the point of sale of merchandise on account as required by the revenue recognition criteria

(b) Revenue should be recognized when the performance or sales effort is substantially

complete This normally occurs when the service is performed, or when goods are delivered at the point of sale, but not necessarily when cash is received In addition, collection must be reasonably assured

Answers to Questions (Continued)

4 (a) Nonbank credit cards: From its own company credit card, Canadian Tire realizes

interest revenue from customers who do not pay the balance due within a specified grace period

Bank credit cards: Bank credit cards offer the following advantages:

(1) The credit card issuer makes the credit card investigation of the customer

(2) The issuer maintains individual customer accounts

(3) The issuer undertakes the collection process and absorbs any losses from uncollectible accounts

(4) The retailer receives cash more quickly from the credit card issuer than it would from individual customers

Debit cards: The advantage of the debit card is that the cash is deducted immediately from the customer’s account There are no credit checks or collection concerns so the service charges are normally lower than for a bank credit card

By using its own credit cards, bank credit cards and debit cards, Canadian Tire provides more options to its customers, increases its revenue, and reduces its risk

4 (b) Nonbank credit cards: To record a company credit card transaction, the seller

records a debit to Accounts Receivable and a credit to Sales

Bank credit cards: To record a bank credit card transaction, the seller records a debit

to Cash and a credit to Sales

Debit cards: To record a debit card transaction, the seller records a debit to Cash and a credit to Sales

Bank charges expense for debit card and bank credit card fees must also be recorded, usually as part of the bank reconciliation process

5 (a) Using an accounts receivable subsidiary ledger makes it possible to determine the

balance owed by an individual customer at any point in time This makes it easier to manage receivables, answer customer inquiries, follow up on payments and decide if additional credit should be granted

(b) The general ledger control account should agree with the total of the individual

accounts in the subsidiary ledger

Answers to Questions (Continued)

6 (a) An aging schedule shows the receivables in various stages outstanding 0–30 days,

31–60 days, 61–90 days, and so on as long as required

(b) The aging schedule is used to apply percentages to outstanding receivables in each

age category to determine the total estimated uncollectible accounts

7 (a) The purpose of the account Allowance for Doubtful Accounts is to show an estimate

of the accounts receivable expected to become uncollectible The allowance account

is used because the amount is only an estimate and we do not know for certain which customers will not pay, so we cannot reduce specific customer accounts in the subsidiary ledger or the related accounts receivable control account in the general ledger Instead we increase the allowance account balance

(b) The account can be in a debit balance if the amount of actual write offs exceeds

previous provisions for bad debts A debit balance will arise during the period when these write offs are recorded, but by the end of the reporting period adjusting entries will be made that will bring the balance in the allowance account back into a credit position The credit entry to this account is offset with a debit to Bad Debts Expense

8 The Bad Debts Expense account reflects only the current year’s estimates while the Allowance for Doubtful Accounts is a cumulative result of estimates, write offs, and subsequent recoveries from the current and prior periods

9 The write off of an uncollectible account reduces both Accounts Receivable and the Allowance for Doubtful Accounts by the same amount Thus, net realizable value (which

is the difference between accounts receivable and allowance for doubtful accounts) does not change Net realizable value will change, however, when an adjusting entry is made

to record the estimate of uncollectible accounts because only the Allowance account is affected in this entry

10 Two journal entries are required because the first journal entry has to restore the previously written off accounts receivable and the second journal entry records the actual receipt of payment on the account This way, there is a record that the person did eventually pay, and that may affect future credit decisions Furthermore, the date on which the determination that the receivable is actually collectible and the date it is actually collected may be different and this would necessitate the separate recording of these events

Answers to Questions (Continued)

11 (a) The similarities between accounts receivable and notes receivable are that they are

both credit instruments, both can be sold, and both are valued at their net realizable value

(b) Differences between accounts receivable and notes receivable include the following

An accounts receivable is an informal promise to pay, while a note receivable is a written promise giving the payee a stronger legal claim A note receivable is a negotiated instrument that can be transferred to another party An account receivable arises from credit sales, while a note receivable can arise for a number of reasons such as the financing of a purchase, lending money, or extending the terms of an account receivable An account receivable is usually due within a short period of time, while a note receivable can extend for longer periods of time (which is why it bears interest) An account receivable does not incur interest unless the account is overdue while a note usually bears interest for an entire period

12 (a) (1) Interest is normally recorded for an account receivable if a customer does not

pay in full within a specified period of time (usually 30 days) The invoice will specifically state the amount or percentage of interest due on overdue accounts (2) In the case of notes receivable, the amount of interest accrues starting from the date of the issuance of the note and continues to the maturity date of the note Interest earned is recorded when accrued at the end of each accounting period

or when collected, whichever comes first

12 (b) (1) Accounts Receivable is normally debited for interest on overdue balances This

accomplishes two goals: updating a particular customer’s balance in the subsidiary ledger to allow management to decide if additional credit should be granted if overdue balances are not yet paid; it also allows the company to easily send a statement of transactions to the customer that includes interest charges so that the customer will be aware of them

(2) In the case of notes receivable when interest revenue is accrued, Interest Receivable is debited The Note Receivable account is for the amount of the principal balance of the loan, whereas the interest is recorded and reported separately

13 Notes are not recorded at their maturity value (which would include interest) because the interest on the note is not receivable when the note is first recorded The interest is earned over time and is recorded when earned

14 Cobden Inc., as the party making the promise to pay, is the maker of the note It would record a note payable Scotiabank, as the party who will be paid, is the payee It would record a note receivable

Answers to Questions (Continued)

15 When a note receivable is honoured at maturity it is paid in full, while a dishonoured note

is not paid in full at maturity A dishonoured note receivable is no longer negotiable The payee still has a claim against the maker of the note and if eventual collection is expected, an accounts receivable is recorded

16 These notes should be recorded at their net realizable value An entry should be made to debit Bad Debts Expense for the 10% expected to be uncollectible and to credit Allowance for Doubtful Notes for the same amount

17 Both the gross amount of receivables and the allowance for doubtful accounts must be reported either in the statement of financial position or in the notes to the financial statements It is usual to report the receivables on the statement of financial position at their net realizable value and to provide additional information about the allowance in the notes to the statements

18 Current assets

Less: Allowance for doubtful accounts xxx

Net realizable value of accounts receivable $xxx

Notes receivable (due in three months) $xxx

Less: Allowance for doubtful notes xxx

Net realizable value of short-term notes xxx

Non-current assets

Notes receivable (due in two years) $xxx

(1) Sales or Service Revenue Revenues

20 The steps involved in receivables management are:

(1) Determine who to extend credit to

(2) Establish a payment period

(3) Monitor collections

(4) Evaluate the liquidity of receivables

Answers to Questions (Continued)

21 To help in determining whether Canam Group’s receivables management has improved

or worsened the average collection period should be determined

22 (a) An increase in the current ratio does not necessarily mean that the liquidity of a

company has improved In order to determine if liquidity has improved, we need to understand why the current ratio rose If it rose because the company has more cash, then the company is more liquid On the other hand if the cash has fallen but inventory has risen by a larger amount because of declining sales, the current ratio will rise but this does not mean that the company is more liquid It simply means that the company has some inventory that it cannot sell and the company has less liquidity The same is true if net accounts receivable increase because of a slowdown

in collections not fully adjusted for in the estimate of uncollectible accounts

(b) Other ratios that focus on specific current assets rather than current assets in total (as the current ratio does) give us insight into the components of working capital and allow us to understand liquidity in more detail Examples include the receivables turnover ratio and the inventory turnover ratio In general, if these ratios are rising, liquidity is improving because cash is being received more quickly

23 If the receivables turnover is significantly higher than its competitors, it means the company is collecting its receivables faster, indicating it may have an earlier payment due date Customers may move to a competitor that does not collect its receivables as quickly to better manage their cash flow

If a company has a receivables turnover that is significantly lower than its competitors, it may be at a competitive disadvantage because it is financing its customers’ purchases for a longer time and delaying the time it takes to receive cash

SOLUTIONS TO BRIEF EXERCISES

Merchandise Inventory 30,000 (b) July 8 Sales Returns and Allowances 7,200

Accounts Receivable 7,200 Merchandise Inventory 4,320

Cost of Goods Sold 4,320

(c) July 9 Cash ($34,800 – $696) 34,104

Sales Discounts ($34,800 × 2%) 696 Accounts Receivable ($42,000 – $7,200) 34,800 (d) Aug 31 Accounts Receivable 696

Interest Revenue [($42,000 – $7,200) × 24% × 1/12] 696

BRIEF EXERCISE 8-3

(a)

Visa card

Cash 100

Sales 100

Bank Charges Expense 2

Cash 2

(b) Nonbank credit card Accounts Receivable 100

Sales 100 Because VISA is sponsored by a bank, it is appropriate to record a debit to cash in the first entry In the second entry, because a nonbank credit card is used, the company bears the entire risk of collecting the amount, so it is recorded in accounts receivable In addition, there are normally no bank charges incurred with respect to the use of a company credit card

BRIEF EXERCISE 8-4

Accounts Receivable Subsidiary Ledger

Jan 7 1,800 Jan 17 700 Jan 15 6,000 Jan 24 2,000 Jan 31 Bal 1,100 Jan 31 Bal 4,000

Lewis Corp

Jan 23 3,700 Jan 29 3,700

Jan 31 Bal 0

General Ledger Control Account

Accounts Receivable

Jan 31 11,500 Jan 31 6,400

Jan 31Bal 5,100

BRIEF EXERCISE 8-5

(a) Bad Debts Expense 20,400

Allowance for Doubtful Accounts 20,400 [($600,000 × 4%) – $3,600]

(b) The amount to be reported as bad debts expense would be

[($600,000 × 4%) + $4,000] = $28,000

Bad Debts Expense 28,000

Allowance for Doubtful Accounts 28,000 BRIEF EXERCISE 8-6

(a)

Number of Days

Outstanding

Accounts Receivable

Estimated % Uncollectible

Total Estimated Uncollected Accounts

Dec 31 Bad Debts Expense ($23,680 – $3,600) 20,080

Allowance for Doubtful Accounts 20,080 BRIEF EXERCISE 8-7

(a) Jan 24 Allowance for Doubtful Accounts 8,000

Accounts Receivable 8,000

Allowance for doubtful accounts 36,000 28,000

BRIEF EXERCISE 8-8

Mar 4 Accounts Receivable 8,000

Allowance for Doubtful Accounts 8,000

4 Cash 8,000

Accounts Receivable 8,000

BRIEF EXERCISE 8-9

Interest Interest Interest

Note #1

$81,000 (1) $54,000 (2) $135,000 Note #2

4,200 (3) 2,100 (4) 6,300 Note #3

Merchandise Inventory 32,000 Feb 1 Notes Receivable 48,000

BRIEF EXERCISE 8-11

2014

April 1 Notes Receivable 10,000

Sales 10,000 Cost of Goods Sold 6,000

Merchandise Inventory 6,000 Dec 31 Interest Receivable ($10,000 × 9% × 9/12) 675

Interest Revenue 675

2015

Mar 31 Cash 10,900

Interest Receivable 675 Notes Receivable 10,000 Interest Revenue ($10,000 × 9% × 3/12) 225

BRIEF EXERCISE 8-12

2014

Apr 1 Merchandise Inventory 10,000

Notes Payable 10,000 Sept 30 Interest Expense ($10,000 × 9% × 6/12) 450

Interest Payable 450

2015

Mar 31 Interest Expense ($10,000 × 9% × 6/12) 450

Interest Payable 450 Notes Payable 10,000 Cash 10,900

BRIEF EXERCISE 8-13

(a)

Apr 1 Notes Receivable 40,000

Accounts Receivable 40,000 July 1 Cash 40,600

Notes Receivable 40,000 Interest Revenue ($40,000 × 6% × 3/12) 600 (b)

Apr 1 Notes Receivable 40,000

Accounts Receivable 40,000 July 1 Accounts Receivable 40,600

Notes Receivable 40,000 Interest Revenue ($40,000 × 6% × 3/12) 600 (c)

Apr 1 Notes Receivable 40,000

Accounts Receivable 40,000 July 1 Allowance for Doubtful Notes 40,000

Notes Receivable 40,000 Note that no interest revenue is recorded in (c) because it is unlikely that it will be collected

BRIEF EXERCISE 8-14

NIAS CORPORATION Statement of Financial Position (Partial)

February 28, 2015

Assets Current assets

Cash $ 150,000 Trading investments 330,000 Accounts receivable $470,000

Less: Allowance for doubtful accounts 30,000 440,000 Notes receivable (due Nov 1, 2015) 300,000 Sales tax recoverable 38,000 Merchandise inventory 380,000 Prepaid rent 8,000 Total current assets $1,646,000

$4,893,624

= 66.8 times turnover $55,954 + $81,477 $81,477 + $65,084

SOLUTIONS TO EXERCISES

EXERCISE 8-1

(a) Compton Limited

Jan 6 Accounts Receivable 24,000

Sales 24,000 Cost of Goods Sold 16,000

Merchandise Inventory 16,000

15 Cash ($24,000 – $480) 23,520

Sales Discounts (2% × $24,000) 480

Accounts Receivable 24,000 (b) Singh Inc Jan 6 Merchandise Inventory 24,000 Accounts Payable 24,000 15 Accounts Payable 24,000 Merchandise Inventory 480

Cash 23,520 EXERCISE 8-2 (a) Feb 2 Accounts Receivable (Andrew Noren) 1,140 Sales 1,140 4 Sales Returns and Allowances 140

Accounts Receivable (Andrew Noren) 140

5 Accounts Receivable (Dong Corporation) 760

Sales 760

8 Cash 842

Sales 842

10 Accounts Receivable (Discovery Sports) 920

Sales 920

EXERCISE 8-2 (Continued)

(a) (Continued)

Feb 14 Cash ($760 – $15) 745

Sales Discount ($760 × 2%) 15 Accounts Receivable (Dong Corporation) 760

17 Accounts Receivable (Andrew Noren) 696

Feb 2 1,140 Feb 4 140 Feb 5 760 Feb 14 760

17 696 28 1,000 Feb 28 Bal 0

Feb 28 Bal 696

Batstone Corporation Discovery Sports (Company Credit Card)

Feb 28 Bal 1,738 Feb 28 Bal 920

General Ledger Control Account

EXERCISE 8-3

(a) Dec 31 Bad Debts Expense ($36,000 – $4,400) 31,600

Allowance for Doubtful Accounts 31,600

(b) Dec 31 Bad Debts Expense

($360,000 × 9% – $4,400) 28,000 Allowance for Doubtful Accounts 28,000 (c) Dec 31 Bad Debts Expense ($36,000 + $2,400) 38,400

Allowance for Doubtful Accounts 38,400

(b) Mar 31 Bad Debts Expense 24,440

Allowance for Doubtful Accounts 24,440 ($33,240 – $8,800)

(c) The net realizable value of the accounts receivable at March 31 is as follows:

Accounts receivable $370,000 Less: Allowance for doubtful accounts 33,240 Net realizable value $336,760

EXERCISE 8-5

(a)

2014

Dec 31 Bad Debts Expense 18,800

Allowance for Doubtful Accounts 18,800 ($16,800 + $2,000)

2015

May 11 Allowance for Doubtful Accounts 1,900

Accounts Receivable 1,900

Nov 12 Accounts Receivable 1,900

Allowance for Doubtful Accounts 1,900

Net realizable value $283,200 $283,200 $281,300

EXERCISE 8-6

(a)

Accounts Receivable March 1 Balance 30,000

(2) Bad debts: $4,500 – [$5,000 – $3,000 (from (1) above)] = $2,500

(b) To record write offs:

Allowance for Doubtful Accounts 3,000

Accounts Receivable 3,000 (c) To record bad debts expense:

Bad Debts Expense 2,500

Allowance for Doubtful Accounts 2,500

EXERCISE 8-7

Nov 1 Notes Receivable 48,000

Cash 48,000 Dec 1 Notes Receivable 8,400

Sales 8,400 Cost of Goods Sold 5,000

28 Interest Receivable 1,513

Interest Revenue 1,513 Calculation of interest revenue on February 28:

Bouchard note: $48,000 × 8% × 4/12 = $1,280

Aqualina note: $16,000 × 7% × 2.5/12 = 233

28 Bad Debt Expense 16,000

Allowance for Doubtful Notes 16,000

Interest Payable 42

Interest Expense 42

Cash 8,484

EXERCISE 8-9

May 1 Notes Receivable 12,000

Accounts Receivable 12,000 June 30 Interest Receivable ($12,000 × 5% × 2/12) 100

Interest Revenue 100 July 31 Notes Receivable 10,000

Cash 10,000 Aug 31 Cash 58

Note Receivable 12,000 Interest Receivable 100

EXERCISE 8-10

DEERE & COMPANY Statement of Financial Position (partial)

October 31, 2012 (in U.S millions)

Assets Current assets

Receivables

Trade accounts and notes receivable $3,799.1

Less: Allowance for doubtful trade and notes receivables 66.0 $ 3,733.1 Financing receivables $22,159.1

Less: Allowance for doubtful financing receivables 177.0 21,982.1 Other receivables 1,790.9 Total receivables $27,506.1

Allowance for doubtful accounts 1,300 SFP

Allowance for doubtful notes (current) 5,000 SFP

Notes receivable (current) 25,000 SFP

Notes receivable (non-current) 75,000 SFP

Sales discounts 12,000 IS Contra operating revenue

(c)

APOLLO CORPORATION Statement of Financial Position (partial)

November 30, 2015

Assets Current assets

Cash $ 7,500 Accounts receivable $18,200

Less: Allowance for doubtful accounts 1,300 16,900 Notes receivable $25,000

Less: Allowance for doubtful notes 5,000 20,000 Advances to employees 2,900 Sales tax recoverable 3,150 Merchandise inventory 26,400 Prepaid insurance 1,500

Total current assets $78,350

($841 + $836) ÷ 2 Average collection period = 365 days = 31 days

11.8 times

2011

Current ratio = $1,848 = 1.1 : 1

$1,715 Receivables turnover = $9,028 = 11.1 times

($836 + $796) ÷ 2 Average collection period = 365 days = 33 days

11.1 times

(b) In 2012, accounts receivable increased 0.6% [($841 − $836) ÷ $836] while revenues

increased 9.9% [($9,920 − $9,028) ÷ $9,028] CN is doing a better job of collecting its accounts receivable The receivables turnover ratio and the average collection period indicate that the company’s management of receivables has improved The turnover has improved from 11.1 times in 2011 to 11.8 times in 2012 The average collection period has decreased from 33 days in 2011 to 31 days in 2012 so cash is being collected sooner

The current ratio has declined from 1.1:1 in 2011 to 0.8:1 in 2012 However, this decrease is not due to slow-collection of receivables (or slow moving inventory) This decrease can be attributed to the 28% [($2,203 – $1,715) ÷ $1,715] increase in current liabilities compared to the modest increase in current assets of 1% [($1,869 – $1,848)

÷ $1,848]

EXERCISE 8-13

(a) At first glance, the increase in the current ratio might lead to the conclusion that Lin’s

liquidity has improved in 2015 When looking further and noting a deterioration in the receivables and inventory turnover ratios in the same period, one must conclude that the increase in the current ratio does not mean that Lin’s liquidity has improved In this case, total current assets have increased in comparison to current liabilities because

of increases in accounts receivable and inventory

(b) Lin must determine the source of the deterioration of both the receivables and

inventory turnover ratios If the deterioration is a result of specific policy changes in the way in which Lin is managing its accounts receivable, by for example extending its credit terms, the result of the deterioration of the accounts receivable turnover is not a surprising result Similarly, if the deterioration of the inventory turnover is a result of a management strategy to improve sales and profitability, the outcome is also not a surprise to management On the other hand, if Lin establishes that there have been no direct causes to the change that can be readily explained through the actions of management, specific measures to improve the management of its accounts receivable and inventory must be undertaken immediately

These measures could include the following for accounts receivable:

1 Establishment of credit policies and credit limits for certain customers

2 Initiate the use of a cash discount to encourage early payment of receivables

3 Aggressively monitor collections to encourage customers to pay on time

These measures could include the following for inventory:

1 Monitor its inventory levels carefully and only reorder when inventory is selling and additional supplies are required

2 Limit the amount of inventory by improving its purchasing relationships with suppliers

3 If possible, move to a just-in-time system where inventory is only purchased as needed

7 Bad Debts Expense 66,000

Allowance for Doubtful Accounts 66,000

PROBLEM 8-1A (Continued)

(c) January 1, 2015

Accounts receivable $1,990,000 Less: Allowance for doubtful accounts 124,000 Net realizable value $1,866,000

December 31, 2015

Accounts receivable $1,960,000 Less: Allowance for doubtful accounts 100,000 Net realizable value $1,860,000

(d)

UNDERWOOD IMPORTS INC

Statement of Financial Position (partial)

December 31, 2015

Assets Current assets

Accounts receivable $1,960,000

Less: Allowance for doubtful accounts 100,000 $1,860,000

(e)

UNDERWOOD IMPORTS INC

Income Statement (partial) Year Ended December 31, 2015 Sales $5,200,000

Less: Sales returns and allowances 80,000

Net sales $5,120,000 Operating expenses

Bad debts expense 66,000 Other revenues and expenses

Interest revenue 400,000

(a) Accounts Receivable 3,800,000

(d) Bad Debts Expense [see (e)] 92,000

Allowance for Doubtful Accounts 92,000

(e)

Accounts Receivable Beg Bal 1,600,000

Sales 3,800,000

Recovery 8,000

Collections 4,084,000 Write off 116,000 Collections 8,000 End Bal 1,200,000

Allowance for Doubtful Accounts

Write off 116,000

Beg Bal 88,000 Recovery 8,000 Bad debts 92,000 End Bal 72,000

Before bad debts expense was recorded, the Allowance account had a debit balance of

$20,000 ($88,000 – $116,000 + $8,000) To adjust this to $72,000 requires a credit to this

account of $92,000 with an offsetting debit to Bad Debts Expense

Statement of Financial Position (partial)

Assets Current assets

Accounts receivable $1,200,000 Less: Allowance for doubtful accounts 72,000 Net realizable value 1,128,000

PROBLEM 8-2A

Accounts Receivable Beg bal 18,000

(a) Addition to accounts receivable (from Sales) = $78,000

(b) Write offs of accounts receivable obtained from reduction of allowance for doubtful

accounts $1,000

(c) $18,000 + $78,000 (a) – $1,000 (b) – $55,000 = $40,000, the ending balance

(d) $1,800 – $1,000 + (d) = $2,000 (e); (d) = $1,200 and this represents the credit side of

the bad debts expense entry

(e) Allowance for doubtful accounts = $2,000 (given)

(f) Bad debts expense = Adjustment to allowance for doubtful accounts = $1,200 [from

(d)]

PROBLEM 8-3A

(a) Total estimated allowance for doubtful accounts:

Number of Days

Outstanding

Accounts Receivable

Estimated Percentage Uncollectible

Estimated Uncollectible Accounts

Bad Debts Expense 13,400

Allowance for Doubtful Accounts 13,400 [$33,400 – $20,000]

(2) If the allowance for doubtful accounts had an unadjusted debit balance of $20,000, the bad debts expense in the entry above would be $53,400 ($33,400 + $20,000) (c) Allowance for Doubtful Accounts 4,000

Accounts Receivable 4,000 (d) Accounts Receivable 1,700

Allowance for Doubtful Accounts 1,700 Cash 1,700

of $20,000, the bad debts expense in the entry above would be $51,200 ($31,200 + $20,000)

Parts (c) and (d): no change

PROBLEM 8-4A

PROBLEM 8-4A (Continued)

(f) Aging the individual accounts should produce a more accurate estimate of the net realizable value of the receivables As the receivables get older, a higher percentage is applied to them when calculating the amount of uncollectible accounts This is more accurate because older receivables have a greater probability of not being collected

(a) Total estimated allowance balance at Dec 31, 2014:

Number of Days

Outstanding

Accounts Receivable

Estimated Percentage Uncollectible

Estimated Uncollectible Accounts

Estimated Percentage Uncollectible

Estimated Uncollectible Accounts

(b) Bad Debts Expense 28,560

Allowance for Doubtful Accounts 28,560 ($37,560 – $9,000)

(c) Allowance for Doubtful Accounts 42,000

PROBLEM 8-5A (Continued)

(e) Bad Debts Expense 55,800

Allowance for Doubtful Accounts 55,800

$54,360 – (balance in the allowance before adjustment):

$54,360 – ($37,560 – $42,000 + $3,000) = $55,800

(f) 2015 2014 Accounts receivable $580,000 $560,000 Less: Allowance for doubtful accounts 54,360 37,560 Net realizable value $525,640 $522,440