ANSWERS TO QUESTIONS
01. The three major types and classification of receivables are
as follows:
Type
(1) Accounts receivable
(2) Notes receivable
(3) Other receivables
Classification
Current asset
Current
or
noncurrent
asset depending on due
date
Current
or
noncurrent
asset depending on due
date
02. Other receivables include nontrade receivables such as
interest receivable, loans to company officers, advances to
employees, and income taxes refundable.
03. Accounts Receivable ..............................................................
50
Interest Revenue................................................................
04. Under the direct write-off method, bad debt losses are not
estimated and no allowance account is used. When an
account is determined to be uncollectible, the loss is debited
to Bad Debts Expense. The direct write-off method makes no
attempt to match bad debts expense to sales revenues, or to
show the net realizable value of the receivables in the
balance sheet. The disadvantages are that it may not match
expenses with revenue and it does not accurately reflect the
collectible value of the accounts receivable on the balance
sheet.
5. The essential features of the allowance method of
accounting for bad debts are:
(1) Uncollectible accounts receivable are estimated in
advance, in order to match the cost of the bad debts
against sales in the same accounting period in which the
sale occurred.
(2) Estimated uncollectibles are debited to Bad Debts
Expense and credited to Allowance for Doubtful
Accounts through an adjusting entry at the end of each
period.
50
(3) Actual uncollectibles are debited to Allowance for
Doubtful Accounts and credited to Accounts Receivable
at the time a specific account is written off.0
Questions Chapter 9 (Continued)
6.
Net realizable value is the difference between Accounts
Receivable (normal debit balance) and the Allowance for
Doubtful Accounts (normal credit balance). Soo Eng should
realize that the decrease in net realizable value occurs when
estimated uncollectibles are recognized in an adjusting entry
(debit Bad Debt Expense; credit Allowance for Doubtful
Accounts). 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
does not change.
7.
The two bases of estimating uncollectibles under the
allowance method are (1) percentage of sales (income
statement method) and (2) percentage of receivables
(balance sheet method). The percentage of sales basis
establishes a percentage relationship between the amount of
credit sales and expected losses from uncollectible
accounts. This method emphasizes the matching of
expenses with revenues. Under the percentage of
receivables basis, the balance in the allowance for doubtful
accounts is derived either (a) by applying a percentage
estimate of bad debts to total receivables or (b) from an
analysis of individual customer accounts. This method
emphasizes net realizable value.
8.
The adjusting entry under the percentage of sales basis is:
Bad Debts Expense ....................................................
Allowance for Doubtful Accounts .......................
4,100
4,100
The adjusting entry under the percentage of receivables
basis is:
Bad Debts Expense ....................................................
2,300
Allowance for Doubtful Accounts ($5,800 – $3,500)
9.
The first entry is made to reverse write-off of the account
receivable. The second entry records the collection of the
account.
2,300
Questions Chapter 9 (Continued)
10. The reasons companies sometimes sell their receivables are:
(1) For competitive reasons, sellers often must provide
financing to purchasers of their goods for extended
periods. Selling receivables provides a more current
source of cash to help finance operations.
(2) Receivables may be sold because they may be the only
reasonable source of cash readily at hand.
(3) Billing and collection are often time-consuming and
costly. As a result, it is often easier for a retailer to sell
the receivable to another party who has expertise in
billing and collection matters. This will also speed up the
collection of cash.
11. By using both its own credit cards, bank credit cards, and
debit cards, Sears provides more options to its customers,
increases its revenue, and reduces its risk.
The journal entries for each type of card follow:
Sears card:
Dr. Accounts Receivable
Cr. Sales Revenue
Bank credit card or debit card:
Dr. Cash
Dr. Credit / Debit Card Expense
Cr. Sales Revenue
12. (a) Principal = $12,000 [($360 x 12/4) ÷ 9%]
(b) Interest = $5,400 [$30,000 x 6% x 3]
(c) Interest rate = 8.33% [($2,500 x 12/6) ÷ $60,000]
(d) Time = 3 months [$875 ÷ ($50,000 x 7%) ÷ 12]
Questions Chapter 9 (Continued)
13. Accounts receivable are amounts owed by customers on
account, resulting from the sale of goods and services in the
normal course of business operations (i.e., in trade). Interest
is not normally charged on accounts receivable unless they
are overdue. Accounts receivable are normally collected
within 30 or so days.
Notes receivable represent claims that are evidenced by
formal instruments of credit. A promissory note gives the
holder a stronger legal claim than one on an account
receivable. As a result, it is easier to sell to another party.
Promissory notes are negotiable instruments, which means
they can be transferred to another party by endorsement.
Interest is normally charged on notes receivable for the
entire maturity period. Notes receivable can extend for any
period of time, from 30 days to a number of years.
14. Payee
Accounts Receivable ...................................................
Notes Receivable .....................................................
Interest Revenue ......................................................
Maker–May Company
Notes Payable ...............................................................
Interest Expense ...........................................................
Accounts Payable ....................................................
xxx
xxx
xxx
xxx
xxx
15. Each of the major types of receivables should be identified in
the balance sheet or in the notes to the financial statements.
Both the gross amount of receivables and the allowance for
doubtful accounts / notes should be reported. If collectible
within a year or the operating cycle, whichever is longer, these
receivables are reported as current assets immediately below
temporary investments.
16. An increase in the current ratio normally indicates an
improvement in short-term liquidity. This may not always be
the case because the composition of current assets may vary.
In order to determine if the increase is an improvement in
financial health, other ratios that should be considered
include: Receivable turnover and collection period and
inventory turnover and days sales in inventory ratios.
xxx
Questions Chapter 9 (Continued)
17. Receivables turnover = Net credit sales ÷ Average accounts
receivable
Net credit sales = Receivables turnover x Average accounts
receivable
Net credit sales = 8.0583 x $4,542,500
Net credit sales = $36,604,828
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 9-1
(a) Other receivables
(b) Notes receivable
(c) Accounts receivable
BRIEF EXERCISE 9-2
July 1
8
31
Accounts Receivable ................................................
Sales ...................................................................
14,000
Sales Returns and Allowances ................................
Accounts Receivable ........................................
3,800
Cash ...........................................................................
Accounts Receivable ($14,000 – $3,800) .........
10,200
14,000
3,800
10,200
BRIEF EXERCISE 9-3
April 30 Bad Debt Expense [($800,000 – $50,000) X 2%] ......
Allowance for Doubtful Accounts ....................
15,000
15,000
BRIEF EXERCISE 9-4
(a) Dec. 31
(b) Dec. 31
Bad Debts Expense [($400,000 X 1%) – $3,000] 1,000
Allowance for Doubtful Accounts ...........
1,000
Bad Debts Expense [($400,000 X 1%) + $800]
Allowance for Doubtful Accounts ...........
4,800
4,800
BRIEF EXERCISE 9-5
(a) Jan. 24 Allowance for Doubtful Accounts ....................
Accounts Receivable..................................
7,000
7,000
(b)
(1)
Accounts receivable
Allowance for doubtful accounts
Net realizable value
(1) Before Write-Off (2) After Write-Off
$700,000
0054,000
$646,000
$693,000
0047,000
$646,000
BRIEF EXERCISE 9-6
March 4
Accounts Receivable .............................................
Allowance for Doubtful Accounts ..................
7,000
Cash ........................................................................
Accounts Receivable ......................................
7,000
7,000
7,000
BRIEF EXERCISE 9-7
Bank credit card:
July 27
Cash ($75 – $2.62) ..................................................
Credit Card Expense ($75 X 3.5%) ........................
Sales ................................................................
72.38
2.62
75.00
(a) Debit card:
The above entry would not change unless the fee is different,
except that the account used to record the fee is called Debit
Card Expense.
(b) Nonbank card:
July 27
Accounts Receivable ($75 – $2.62) .......................
Credit Card Expense ($75 X 3.5%) ........................
Sales ................................................................
72.38
2.62
75.00
BRIEF EXERCISE 9-8
(a) Total Interest = $15,000 [$900,000 x 10% x 2/12]
(b) Interest Rate = 8% [($526.67 x 12) ÷ $79,000]
(c) Principal = $56,000 [($1,680 x 12/6) ÷ 6%]
BRIEF EXERCISE 9-9
Jan. 10
Feb.
9
Accounts Receivable–Opal ...................................
Sales................................................................
9,000
Notes Receivable–Opal .........................................
Accounts Receivable–Opal ...........................
9,000
9,000
9,000
BRIEF EXERCISE 9-10
(a)
Apr.
July
(b)
Apr.
July
(c)
Apr.
July
1
1
1
1
1
1
Notes Receivable ...................................................
Accounts Receivable .....................................
10,000
Cash ........................................................................
Notes Receivable............................................
Interest Revenue ($10,000 x 7% x 3/12) ........
10,175
Notes Receivable ...................................................
Accounts Receivable .....................................
10,000
Accounts Receivable .............................................
Notes Receivable............................................
Interest Revenue ($10,000 x 7% x 3/12) ........
10,175
Notes Receivable ...................................................
Accounts Receivable .....................................
10,000
Allowance for Doubtful Notes ...............................
Notes Receivable............................................
10,000
10,000
10,000
175
10,000
10,000
175
10,000
10,000
BRIEF EXERCISE 9-11
(a) Feb. 28 Bad Debts Expense ...........................................
Allowance for Doubtful Accounts .............
(b)
36,000
36,000
WENDY COMPANY
Balance Sheet (Partial)
February 28, 2003
Assets
Current assets
Cash
Accounts receivable ......................................... $600,000
Less: Allowance for doubtful accounts .........
36,000
Merchandise inventory .....................................
Prepaid expenses .............................................
Total current assets ................................
BRIEF EXERCISE 9-12
Receivables turnover
$11,006 ÷ [($420 + $380) ÷ 2] = 27.52 times
Collection period
365 days ÷ 27.52 = 13.27 days
$090,000
564,000
130,000
13,000
$797,000
SOLUTIONS TO EXERCISES
EXERCISE 9-1
1.
Jan.
Feb.
2.
6
5
Jan. 10
Feb. 12
Mar. 10
Accounts Receivable—Watson.......................
Sales..........................................................
5,000
Cash ..................................................................
Accounts Receivable—Watson ...............
5,000
Accounts Receivable—Giger ..........................
Sales..........................................................
11,000
Cash ..................................................................
Accounts Receivable—Giger ..................
6,000
Accounts Receivable—Giger ..........................
Interest Revenue ......................................
[2% X ($11,000 – $6,000)]
100
5,000
5,000
11,000
6,000
100
EXERCISE 9-2
(a) (1) Dec. 31
(2) Dec. 31
(b) (1) Dec. 31
(2) Dec. 31
Bad Debts Expense ..................................
[($840,000 – $40,000) X 1%]
Allowance for Doubtful Accounts ...
8,000
Bad Debts Expense ..................................
Allowance for Doubtful Accounts ...
[($110,000 X 10%) – $2,500]
8,500
Bad Debts Expense ..................................
[($840,000 – $40,000) X 0.5%]
Allowance for Doubtful Accounts ...
4,000
Bad Debts Expense ..................................
Allowance for Doubtful Accounts ...
[($110,000 X 5%) + $500]
6,000
8,000
8,500
4,000
6,000
EXERCISE 9-3
(a)
Accounts Receivable
Amount
0-30 days outstanding
31-60 days outstanding
61-90 days outstanding
Over 90 days outstanding
$65,000
017,600
008,500
006,400
(b) Mar. 31
%
2
10
30
50
Estimated
Uncollectible
$1,300
01,760
02,550
03,200
$8,810
Bad Debts Expense .........................................
Allowance for Doubtful Accounts ...........
7,010
7,010
($8,810 – $1,800)
EXERCISE 9-4
2002
Dec. 31
Bad Debts Expense (2% X $400,000) ....................
Allowance for Doubtful Accounts ..................
8,000
Allowance for Doubtful Accounts .........................
Accounts Receivable–Worthy ........................
1,100
Accounts Receivable–Worthy ...............................
Allowance for Doubtful Accounts ..................
1,100
Cash ........................................................................
Accounts Receivable–Worthy ........................
1,100
8,000
2003
May 11
1,100
June 12
1,100
12
1,100
EXERCISE 9-5
(a) Dec. 15
Cash ($250 - $7.50).......................................
Credit Card Expense ($250 x 3%) ...............
Sales......................................................
242.50
7.50
250.00
(b) Apr.
2
Accounts Receivable—Zachos ................... 1,300.00
Sales......................................................
1,300.00
May
3
Cash ..............................................................
Accounts Receivable—Zachos ...........
700.00
Accounts Receivable—Zachos ...................
Interest Revenue ..................................
[28.8% X ($1,300 – $700) x 1/12 ]
14.40
June 1
700.00
EXERCISE 9-6
One possible reason CN sold its receivables may have been to
provide it with a source of current financing. Other possible
reasons include not wanting to deal with the administration of
collecting accounts, the desire to accelerate cash receipts, or to
improve its financial ratios (e.g., receivables turnover).
14.40
EXERCISE 9-7
Nov.
Dec.
1
1
16
31
Notes Receivable–A. Morgan ............................
Cash ............................................................
18,000
Notes Receivable–Wright. .................................
Sales............................................................
3,600
Notes Receivable–Barnes .................................
Accounts Receivable–Barnes ...................
4,000
Interest Receivable ............................................
Interest Revenue* .......................................
331
18,000
3,600
4,000
331
*Calculation of interest revenue:
Morgan: $18,000 X 10% X 2/12 .....................................
Wright: $3,600 X 6% X 1/12 ..........................................
Barnes: $4,000 X 8% X 0.5/12 ......................................
Total accrued interest ..............................................
$300
18
13
$331
EXERCISE 9-8
2002
May
1
Dec. 31
2003
May
1
Notes Receivable–Jones .....................................
Accounts Receivable—Jones......................
10,500
Interest Receivable ..............................................
Interest Revenue ($10,500 X 10% X 8/12) ....
700
Cash ......................................................................
Notes Receivable–Jones .............................
Interest Receivable .......................................
Interest Revenue ($10,500 X 10% X 4/12) ....
11,550
10,500
700
10,500
700
350
EXERCISE 9-9
(a) Nov. 1
Accounts Receivable–Fein.............................. 4,200
Notes Receivable–Fein ............................
Interest Revenue ......................................
($4,000 X 10% X 6/12)
To record the dishonour of Fein Inc.
note, with expectation of future collection.
Allowance for Doubtful Notes ........................
4,000
Notes Receivable–Fein ...........................
To record the dishonour of Fein Inc.
note, with no expectation of collection.
EXERCISE 9-10
4,000
200
(b) Nov. 1
(a) Jan. 15
Accounts Receivable .......................................
Sales..........................................................
15,000
20 Cash ($4,500 – $225) ........................................
Credit Card Expense ($4,500 X 5%) ................
Sales..........................................................
4,275
225
4,000
15,000
4,500
30
Cash ($1,000 - $30)...........................................
Debit Card Expense ($1,000 X 3%) .................
Sales..........................................................
970
30
Cash ..................................................................
Accounts Receivable ...............................
12,000
Accounts Receivable ($3,000 X 18% x 1/12) ..
Interest Revenue ......................................
45
1,000
Feb. 10
15
12,000
(b) Interest Revenue is reported under other revenues and gains.
The Credit Card Expense and Debit Card Expense accounts are
usually categorized as selling expenses.
45
EXERCISE 9-11
DROST COMPANY
Balance Sheet (Partial)
October 31, 2003
(In millions)
Assets
Current assets
Accounts receivable ....................................... $2,907
Less: Allowance for doubtful accounts ........
31
Advances to employees .................................
Notes receivable .............................................
HST recoverable .............................................
Total current assets ..............................
$2,876
5
228
25
$3,134
EXERCISE 9-12
Nike
Receivables Turnover
$8,995.1 ÷ $1,569.4 = 5.73 times
365 days ÷ 5.73 = 63.7 days
Reebok
$2,899.9 ÷ $417.4 = 6.95 times
365 days ÷ 6.95 = 52.5 days
Nike’s receivable turnover and collection period are not as good
as Reebok’s or the industry average. Reebok’s ratios are slightly
better than the industry average.
SOLUTIONS TO PROBLEMS
PROBLEM 9-1A
(a) 1.
2.
Accounts Receivable ....................................... 3,300,000
Sales ..........................................................
3,300,000
Sales Returns and Allowances .......................
Accounts Receivable ...............................
50,000
50,000
3.
Cash .................................................................. 2,800,000
Accounts Receivable ...............................
2,800,000
4.
Allowance for Doubtful Accounts ...................
Accounts Receivable ...............................
90,000
Accounts Receivable .......................................
Allowance for Doubtful Accounts .........
25,000
Cash .................................................................
Accounts Receivable ............................
25,000
5.
90,000
25,000
25,000
(b)
Accounts Receivable
Bal.
(1)
(5)
960,000
3,300,000
25,000
Bal.
1,320,000
(2)
(3)
(4)
(5)
50,000
2,800,000
90,000
25,000
Allowance for Doubtful Accounts
(4)
90,000
Bal.
(5)
70,000
25,000
Bal.
5,000
PROBLEM 9-1A (Continued)
(c) Balance before adjustment [see (b)] ............................
Balance needed .............................................................
Adjustment required .....................................................
$
5,000
125,000
$120,000
The journal entry would therefore be as follows:
March 31 Bad Debts Expense .................................... 120,000
Allowance for Doubtful Accounts .......
120,000
PROBLEM 9-2A
(a) $38,000
(b) $63,000 ($2,100,000 X 3%)
The balance in the Allowance for Doubtful Accounts is
irrelevant.
(c) $47,400 [($840,000 X 6%) – $3,000]
(d) $53,400 [($840,000 X 6%) + $3,000]
(e) The weaknesses of the direct write-off method are two-fold.
First, it does not match expenses with revenues. Second, the
accounts receivable are not stated at their estimated net
realizable value at the balance sheet date.
PROBLEM 9-3A
(a) Dec. 31
Bad Debts Expense .........................................
Allowance for Doubtful Accounts ...........
Estimated bad debts
Less: Unadjusted balance
Adjustment required
16,050
16,050
$25,050
9,000
$16,050
(a) and (b)
Bad Debts Expense
Date
Explanation
2002
Dec. 31
Adjusting entry
Ref.
Debit
Credit
16,050
Balance
16,050
Allowance for Doubtful Accounts
Date
2002
Dec. 31
31
2003
Mar. 1
May 1
Explanation
Balance
Adjusting entry
Ref.
Debit
Credit

Balance
16,050
09,000
25,050
00,1,000
24,050
25,050
1,000
PROBLEM 9-3A (Continued)
(b)
1.
2.
Mar.
May
1
1
1
Allowance for Doubtful Accounts ...................
Accounts Receivable ...............................
1,000
Accounts Receivable .......................................
Allowance for Doubtful Accounts ...........
1,000
Cash ..................................................................
Accounts Receivable ...............................
1,000
Bad Debts Expense .........................................
Allowance for Doubtful Accounts ...........
($37,100 - $25,050)
12,050
1,000
1,000
1,000
(c)
Dec. 31
12,050
PROBLEM 9-4A
(a)
Accounts Receivable
Amount
0-30 days outstanding
31-60 days outstanding
61-90 days outstanding
Over 90 days outstanding
$100,000
60,000
50,000
30,000
%
1
5
10
25
Estimated
Uncollectible
$ 1,000
3,000
5,000
7,500
$16,500
(b) Bad Debts Expense .......................................................
Allowance for Doubtful Accounts ($16,500 – $10,000)
6,500
(c) Allowance for Doubtful Accounts ................................
Accounts Receivable ..............................................
2,000
(d) Accounts Receivable ....................................................
Allowance for Doubtful Accounts ..........................
1,000
Cash ...............................................................................
Accounts Receivable ..............................................
1,000
6,500
2,000
1,000
(e) When an allowance is established, an estimate is made of the
accounts receivable or credit sales that will not be collected.
An entry is made to record this estimate in the period in which
the sale occurred. This matches the estimated expense with
the revenue it generated.
SOLUTIONS TO PROBLEMS
PROBLEM 9-1A
1,000
(a) 1.
2.
Accounts Receivable ....................................... 3,300,000
Sales ..........................................................
3,300,000
Sales Returns and Allowances .......................
Accounts Receivable ...............................
50,000
50,000
3.
Cash .................................................................. 2,800,000
Accounts Receivable ...............................
2,800,000
4.
Allowance for Doubtful Accounts ...................
Accounts Receivable ...............................
90,000
Accounts Receivable .......................................
Allowance for Doubtful Accounts .........
25,000
Cash .................................................................
Accounts Receivable ............................
25,000
5.
90,000
25,000
25,000
(b)
Accounts Receivable
Bal.
(1)
(5)
960,000
3,300,000
25,000
Bal.
1,320,000
(2)
(3)
(4)
(5)
50,000
2,800,000
90,000
25,000
Allowance for Doubtful Accounts
(4)
90,000
Bal.
(5)
70,000
25,000
Bal.
5,000
PROBLEM 9-1A (Continued)
(c) Balance before adjustment [see (b)] ............................
Balance needed .............................................................
Adjustment required .....................................................
$
5,000
125,000
$120,000
The journal entry would therefore be as follows:
March 31 Bad Debts Expense .................................... 120,000
Allowance for Doubtful Accounts .......
120,000
PROBLEM 9-2A
(a) $38,000
(d) $63,000 ($2,100,000 X 3%)
The balance in the Allowance for Doubtful Accounts is
irrelevant.
(c) $47,400 [($840,000 X 6%) – $3,000]
(d) $53,400 [($840,000 X 6%) + $3,000]
(e) The weaknesses of the direct write-off method are two-fold.
First, it does not match expenses with revenues. Second, the
accounts receivable are not stated at their estimated net
realizable value at the balance sheet date.
PROBLEM 9-3A
(a) Dec. 31
Bad Debts Expense .........................................
Allowance for Doubtful Accounts ...........
Estimated bad debts
Less: Unadjusted balance
Adjustment required
16,050
16,050
$25,050
9,000
$16,050
(a) and (b)
Bad Debts Expense
Date
Explanation
2002
Dec. 31
Adjusting entry
Ref.
Debit
Credit
16,050
Balance
16,050
Allowance for Doubtful Accounts
Date
2002
Dec. 31
31
2003
Mar. 1
May 1
Explanation
Balance
Adjusting entry
Ref.
Debit
Credit

Balance
16,050
09,000
25,050
00,1,000
24,050
25,050
1,000
PROBLEM 9-3A (Continued)
(b)
1.
2.
Mar.
May
1
1
1
Allowance for Doubtful Accounts ...................
Accounts Receivable ...............................
1,000
Accounts Receivable .......................................
Allowance for Doubtful Accounts ...........
1,000
Cash ..................................................................
Accounts Receivable ...............................
1,000
Bad Debts Expense .........................................
Allowance for Doubtful Accounts ...........
($37,100 - $25,050)
12,050
1,000
1,000
1,000
(c)
Dec. 31
12,050
PROBLEM 9-4A
(a)
Accounts Receivable
Amount
0-30 days outstanding
31-60 days outstanding
61-90 days outstanding
Over 90 days outstanding
$100,000
60,000
50,000
30,000
%
1
5
10
25
Estimated
Uncollectible
$ 1,000
3,000
5,000
7,500
$16,500
(b) Bad Debts Expense .......................................................
Allowance for Doubtful Accounts ($16,500 – $10,000)
6,500
(e) Allowance for Doubtful Accounts ................................
Accounts Receivable ..............................................
2,000
(d) Accounts Receivable ....................................................
Allowance for Doubtful Accounts ..........................
1,000
Cash ...............................................................................
Accounts Receivable ..............................................
1,000
6,500
2,000
1,000
(e) When an allowance is established, an estimate is made of the
accounts receivable or credit sales that will not be collected.
An entry is made to record this estimate in the period in which
the sale occurred. This matches the estimated expense with
the revenue it generated.
1,000
PROBLEM 9-5A
(a) Bad Debts Expense (3% X $1,000,000)....................... 30,000
Allowance for Doubtful Accounts .......................
30,000
(b) Allowance for Doubtful Accounts ..............................
Accounts Receivable ...........................................
37,000
37,000
(c) Accounts Receivable ..................................................
Allowance for Doubtful Accounts .......................
5,000
Cash .............................................................................
Accounts Receivable ...........................................
5,000
(d) Beginning balance .......................................................
Add:
Bad debt expense ..........................................
Recovery of account .....................................
Deduct: Write-off of uncollectible accounts ..............
Ending balance ............................................................
5,000
5,000
$09,000
30,000
5,000
(37,000)
$ 7,000
(e) When the percentage of sales (income statement) method is
used to estimate bad debts, recoveries of accounts
previously written off do not directly affect the bad debts
expense (They may have an indirect effect, by influencing the
estimator’s judgment regarding the appropriate percentage
of sales to use).
If the percentage of receivables (balance sheet) method of
providing for bad debts was used, the recovery would have a
direct effect by increasing the balance is the allowance
account and therefore reducing the expense to be recorded
in the year-end adjustment.
PROBLEM 9-6A
Yr. 1 Balance
Sales
Yr. 2 Balance
Accounts Receivable
8,300,000
28,500,000
Write-offs
Collections
9,500,000
Allowance for Doubtful Accounts
Yr. 1 Balance
Bad debts
Write-offs
105,000
Yr. 2 Balance
Year 2
Bad Debts Expense ............................................
Allowance for Doubtful Accounts ...........
105,000
27,195,000
750,000
285,000
930,000
285,000
285,000
Accounts Receivable ......................................... 28,500,000
Sales .........................................................
28,500,000
($285,000 = 1% of sales; Therefore sales = $28,500,000)
Allowance for Doubtful Accounts .....................
Accounts Receivable ...............................
105,000
105,000
($750,000 + $285,000 – $930,000 = $105,000)
Cash……….. ........................................................ 27,195,000
Accounts Receivable ...............................
($8,300,000 + $28,500,000 – $105,000 – $9,500,000 =
$27,195,000)
27,195,000
PROBLEM 9-7A
(a)
Merchandise inventory at beginning of year .......................
Add: Purchases .....................................................................
Goods available for sale ........................................................
Less: Merchandise inventory at end of year ........................
Cost of goods sold.................................................................
Add: Gross profit ...................................................................
Total sales ..............................................................................
Less: Cash sales ...................................................................
Credit sales.............................................................................
$36,000
60,000
96,000
32,000
64,000
27,000
91,000
15,000
$76,000
(b)
Accounts receivable at beginning of year ............................
Add: Credit sales ..................................................................
$24,000
76,000
100,000
Less: Accounts collected during the year ........... $61,000
Accounts written off during the year ..........
1,000
Accounts receivable at end of year ......................................
Beg. balance
Credit sales
End. balance
Accounts Receivable
24,000
76,000
Write-offs
Collections
38,000
1,000
61,000
62,000
$38,000
PROBLEM 9-8A
Jan.
Feb.
5
2
12
26
Apr.
5
12
June 2
July
4
15
Oct. 13
Dec. 31
Accounts Receivable—Brooks Company ..........
Sales..............................................................
7,000
Notes Receivable—Brooks Company ................
Accounts Receivable—Brooks Company...
7,000
Notes Receivable—Gage Company ....................
Sales..............................................................
7,800
Accounts Receivable—Mathias Co.....................
Sales..............................................................
4,000
Notes Receivable—Mathias Co. ..........................
Accounts Receivable—Mathias Co. ............
4,000
Cash ($7,800 + $130) ............................................
Notes Receivable—Gage Company ............
Interest Revenue ..........................................
($7,800 X 10% X 2/12)
7,930
Cash ($7,000 + $187) ............................................
Notes Receivable—Brooks Company .........
Interest Revenue ..........................................
($7,000 X 8% X 4/12)
7,187
Accounts Receivable—Mathias Co.....................
($4,000 + $80)
Notes Receivable—Mathias Co. ..................
Interest Revenue ($4,000 X 8% X 3/12)........
4,080
Notes Receivable—Tritt Inc. ................................
Sales..............................................................
5,000
Allowance for Doubtful Notes .............................
Notes Receivable—Tritt Inc. ........................
5,000
No entry required
7,000
7,000
7,800
4,000
4,000
7,800
130
7,000
187
4,000
80
5,000
5,000
PROBLEM 9-9A
(a) Oct.
1
7
12
15
31
31
Cash ..................................................................
Notes Receivable—Foran ........................
Interest Receivable...................................
($8,000 X 6% X 2/12)
8,080
Accounts Receivable .......................................
Sales..........................................................
6,900
Cash ($750 – $26.25) ........................................
Credit Card Expense ($750 X 3.5%) ................
Sales..........................................................
723.75
26.25
Accounts Receivable .......................................
Interest Revenue ......................................
485
Accounts Receivable—Drexler .......................
Notes Receivable—Drexler ......................
Interest Receivable...................................
($8,000 X 12% X 1/12)
Interest Revenue ......................................
($8,000 X 12% X 1/12)
8,160
Interest Receivable ..........................................
($12,000 X 9% X 1/12)
Interest Revenue ......................................
90
8,000
80
6,900
750.00
485
8,000
80
80
90
PROBLEM 9-9A (Continued)
(b)
Notes Receivable
Date
Oct.
Explanation
1
1
31
Balance
Ref.
Debit
Credit
Balance
8,000
8,000
28,000
20,000
12,000
Credit
Balance

Accounts Receivable
Date
Oct.
Explanation
Ref.
7
15
31
Debit
6,900
0,485
8,160
06,900
07,385
15,545
Interest Receivable
Date
Oct.
Explanation
1
1
31
31
Ref.
Debit
Credit
Balance
80
80
61.55
160
80
0
90
Balance
90
(c)
TARDIF COMPANY
Balance Sheet (partial)
October 31, 2003
Assets
Current assets
Notes receivable .........................................................
Accounts receivable ...................................................
Interest receivable ......................................................
Total current assets ..........................................
$12,000
15,545
90
$27,635
PROBLEM 9-9A (Continued)
(d) Oct. 31 Allowance for Doubtful Notes ...........................
Notes Receivable—Drexler ..........................
Interest Receivable .......................................
8,080
Note that the interest previously accrued on this note should
be written off, as well as the note itself. Also, no interest
would be accrued for October.
8,000
80
PROBLEM 9-10A
(a)
2000
1999
Current ratio
$1,125 ÷ $1,903 =
0.6:1
$1,527 ÷ $1,777 =
0.9:1
Acid test ratio
$756 ÷ $1,903 =
0.4:1
$1,110 ÷ $1,777 =
0.6:1
(b)
2000
1999
Receivables
turnover
$5,446 ÷ $770 =
7.1x
$5,261 ÷ $603.5 =
8.7x
Collection period
365 days ÷ 7.1
= 51.4 days
365 days ÷ 8.7
= 42.0 days
(c) CN’s short-term liquidity has deteriorated. The current and acid
test ratios both declined. The receivables turnover is less and
the average collection period is longer.
PROBLEM 9-1B
(a) 1.
2.
3.
4.
5.
Accounts Receivable .................................
Sales ...................................................
2,600,000
Sales Returns and Allowances .................
Accounts Receivable .........................
40,000
Cash............................................................
Accounts Receivable .........................
2,300,000
Allowance for Doubtful Accounts ............
Accounts Receivable .........................
65,000
Accounts Receivable .................................
Allowance for Doubtful Accounts .....
25,000
Cash............................................................
Accounts Receivable .........................
25,000
Bad Debts Expense ..................................
Allowance for Doubtful Accounts ....
[($2,600,000 - $40,000) X 2%]
51,200
2,600,000
40,000
2,300,000
65,000
25,000
25,000
(b)
51,200
(c)
Accounts Receivable
Bal. 1,000,000 (2)
40,000
(1)
2,600,000 (3)
2,300,000
(5)
25,000 (4)
65,000
(5)
25,000
Bal. 1,195,000
Allowance for Doubtful Accounts
(4)
65,000 Bal.
60,000
(5)
25,000
51,200
Bal.
71,200
PROBLEM 9-2B
(a) $24,000
(b) $45,000 ($1,500,000 X 3%)
(c) $27,000 [($600,000 X 5%) – $3,000]
(d) $32,000 [($600,000 X 5%) + $2,000]
(e) The direct write-off method of reporting bad debts expense is
not in accordance with generally accepted accounting
principles because it does not match expenses with the
associated revenues. In addition, the accounts receivable are
not stated at their net realizable value at the balance sheet
date.
(f)
The answer will vary depending on which method the student
prefers.
Example:
Although either method is acceptable, I prefer the percentage
of receivables (ageing) basis because I believe it results in a
better estimate. It also may lead to better accounts receivable
management because of the focus on the age of individual
accounts and evaluation of loss percentages in each age
category.
Often, I find it helpful to use both methods together to help
check the reasonableness of the estimate.
PROBLEM 9-3B
(a) Dec. 31
(b)
1. Mar. 31
2.
Bad Debts Expense ..................................... 18,950
Allowance for Doubtful Accounts ......
($28,950 – $10,000)
Allowance for Doubtful Accounts ..............
Accounts Receivable ..........................
800
Accounts Receivable ..................................
Allowance for Doubtful Accounts ......
800
31 Cash .............................................................
Accounts Receivable ..........................
800
May 31
Bad Debts Expense
Date
Explanation
2002
Dec. 31
Ref.
Adjusting
Allowance for Doubtful Accounts
Date
Explanation
2002
Dec. 31 Balance
31 Adjusting
2003
Mar. 31
May 31
Debit
800
800
800
Credit
18,950
Ref.
Debit
18,950
Balance
18,950
Credit
Balance
18,950
10,000
28,950
800
28,150
28,950
800
(c)
Dec. 31
Bad Debts Expense ..................................
Allowance for Doubtful Accounts ...
($40,000 - $37,030)
2,970
2,970
PROBLEM 9-4B
(a) Total estimated bad debts
Total
Accounts
receivable
% uncollectible
Estimated bad
debts
Number of Days Past Due
0-30
31-60
61-90
Over 90
$375,000 $220,000 $90,000 $40,000
1%
$10,300
$2,200
4%
$3,600
5%
$25,000
10%
$2,000
(b) Bad Debts Expense ..................................................
Allowance for Doubtful Accounts ....................
[$10,300 + $10,000]
20,300
(c) Allowance for Doubtful Accounts ...........................
Accounts Receivable ........................................
5,000
(d) Accounts Receivable ...............................................
Allowance for Doubtful Accounts ....................
5,000
Cash .........................................................................
Accounts Receivable ........................................
5,000
$2,500
20,300
5,000
5,000
(e) If Image.com used 3% of accounts receivable rather than
ageing the accounts the allowance at year-end, the
adjustment would be $21,250 [($375,000 x 3%) + $10,000]. The
remaining entries would remain unchanged.
(f) Ageing the accounts rather than applying a percentage to the
total accounts receivable should produce a more accurate
allowance and bad debt expense when the ageing of the
accounts change. It also focuses management attention on
the receivables and the loss percentages, which can result in
better receivables management.
5,000
PROBLEM 9-5B
(a) Accounts Receivable .............................................
Sales ................................................................
1,300,000
(b) Allowance for Doubtful Accounts .........................
Accounts Receivable ......................................
41,000
(c) Accounts Receivable .............................................
Allowance for Doubtful Accounts ..................
5,200
Cash ........................................................................
Accounts Receivable ......................................
5,200
1,300,000
41,000
5,200
5,200
(d) Accounts receivable:
Beginning balance ..................................................
Add:
Credit sales ...............................................
$ 150,000
1,300,000
1,450,000
Deduct: Collections on account ......................
$1,225,000
Write-off of uncollectible accounts ...
41,000
Unadjusted balance ................................................
Allowance for doubtful accounts:
Beginning balance ..................................................
Add:
Recovery of account ................................
Deduct: Write-off of uncollectible accounts .........
Unadjusted balance ................................................
(e) Bad Debts Expense [(12% X $184,000) + $25,800)
Allowance for Doubtful Accounts ..................
1,266,000
$ 184,000
$10,000
5,200
41,000
$25,800 Debit
47,880
47,880
PROBLEM 9-5B (Continued)
(f)
Accounts receivable:
Beginning balance ...............................................
Add:
Credit sales ............................................
Deduct: Collections on account ......................... $1,225,000
Write-off of uncollectible accounts ......
41,000
Ending balance ....................................................
Allowance for doubtful accounts:
Beginning balance ................................................
Add:
Recovery of account ..............................
Bad debts expense .................................
Deduct: Write-off of uncollectible accounts .......
Ending balance .....................................................
$ 150,000
1,300,000
1,450,000
1,266,000
$ 184,000
$10,000
5,200
47,880
63,080
41,000
$22,080
PROBLEM 9-6B
Yr. 1 Balance
Sales
Yr. 2 Balance
Accounts Receivable
4,100,000
22,500,000
Write-offs
Collections
4,800,000
150,000
21,650,000
Allowance for Doubtful Accounts
Yr. 1 Balance
Bad debts
Write-offs
150,000
Yr. 2 Balance
350,000
225,000
425,000
Allowance for Doubtful Accounts .................
Accounts Receivable ...........................
150,000
Bad Debts Expense ........................................
Allowance for Doubtful Accounts .......
225,000
150,000
225,000
($350,000 – $150,000 – $425,000 = $225,000)
Accounts Receivable .....................................
Sales .....................................................
22,500,000
22,500,000
($225,000 = 1% of sales; Therefore sales = $22,500,000)
Cash……….. ....................................................
Accounts Receivable ...........................
21,650,000
21,650,000
($4,100,000 + $22,500,000 – $150,000 – $4,800,000 =
$21,650,000)
PROBLEM 9-7B
(a)
Sales
Cost of goods sold
Gross profit on sales
Total sales
Cash sales
Credit sales
?
66,000
31,000
= $97,000 ($31,000 + $66,000)
= 18,000
= $79,000
(b) Accounts receivable at December 31 is $24,500, as shown
below:
Accounts Receivable
Beg. balance 27,000
Credit sales 79,000
Write-offs
Collections
End. balance 24,500
1,500
80,000
PROBLEM 9-8B
(a)
Jan.
5
20
Feb. 18
Apr. 20
30
May 25
Aug. 18
23
Sept. 1
Accounts Receivable—George Company ........
Sales............................................................
18,000
Notes Receivable—George Company ..............
Accounts Receivable—George Company
18,000
Notes Receivable—Swaim Company ...............
Sales............................................................
8,000
Cash ($18,000 + $405) ........................................
Notes Receivable—George Company.......
Interest Revenue ........................................
($18,000 X 9% X 3/12)
18,405
Cash ($15,000 + $400) ........................................
Notes Receivable—Annabelle Company ..
Interest Revenue ........................................
($15,000 X 8% X 4/12)
15,400
Notes Receivable—Avery Inc. ...........................
Accounts Receivable—Avery Inc. .............
6,000
Cash ($8,000 + $400) ..........................................
Notes Receivable—Swaim Company ........
Interest Revenue ........................................
($8,000 X 10% X 6/12)
8,400
Allowance for Doubtful Notes ...........................
Notes Receivable—Avery Inc. ...................
6,000
Notes Receivable—Young Company................
Sales ...........................................................
12,000
18,000
18,000
8,000
18,000
405
15,000
400
6,000
8,000
400
6,000
12,000
PROBLEM 9-8B (Continued)
Nov. 22
There would probably be no entry made on November
22. Since financial statements are prepared only at
year-end, Dot.com Company would probably wait until
December 31 before making a decision regarding
whether the note should be written off.
Dec. 31
Interest Receivable ...............................................
Interest Revenue ...........................................
($12,000 x 10% X 4/12)
400
400
The company would evaluate the information available
on Young Company and may decide to write off the
note and not accrue the interest. If they decide that a
write-off is appropriate, the above entry would not be
made and the following entry would be made:
Dec. 31
Allowance for Doubtful Notes .............................. 12,000
Notes Receivable ........................................
12,000
(b) Interest should not be accrued if it is unlikely to be collected.
In addition, consideration would have to be given to whether
the note should be written off. At the very least, an allowance
should be created with respect to the Young Company note,
based upon the estimated probability of collection.
PROBLEM 9-9B
(a)
Don Co. $6,000 X 12% X 2/12 = $120
Jean Co. $4,800 X 11% X 1/12 = 44
Total
$164
(b) July 1
5
14
16
31
31
Cash ($6,000 + $120) ....................................
Notes Receivable—Don Co. .................
Interest Receivable ...............................
($6,000 X 12% X 2/12)
6,120
Accounts Receivable ...................................
Sales ......................................................
6,200
Cash ($700 – $21) .........................................
Credit Card Expense ($700 X 3%) ...............
Sales ......................................................
679
21
Accounts Receivable ...................................
Interest Revenue ...................................
415
Accounts Receivable—Jean Co ..................
Notes Receivable—Jean Co. ................
Interest Receivable ...............................
($4,800 X 11% X 1/12)
Interest Revenue ...................................
($4,800 X 11% X 1/12)
4,888
Interest Receivable .......................................
($10,000 X 9% X 1/12)
Interest Revenue ...................................
75
6,000
120
6,200
700
415
4,800
44
44
75
PROBLEM 9-9B (Continued)
(c)
Notes Receivable
Date
Explanation
July 1
1
31
Ref.
Debit
Balance
6,000
4,800
20,800
14,800
10,000
Credit
Balance

Balance
Accounts Receivable
Date
Explanation
Ref.
Debit
July 5
16
31
6,200
415
4,888
Interest Receivable
Date
Explanation
July 1
1
31
31
Credit
Ref.
Debit
6,200
6,615
11,503
Credit
Balance
120
44
164
44
0
75

Balance
Adjusting entry
75
(d)
OUELLETTE CO.
Balance Sheet (partial)
July 31, 2003
Assets
Current assets
Notes receivable ..............................................................
Accounts receivable ........................................................
Interest receivable ...........................................................
Total current assets .................................................
$10,000
11,503
75
$21,578
PROBLEM 9-9B (Continued)
(e) Interest should not be accrued if it is unlikely to be collected.
In addition, consideration would have to be given to whether
the note should be written off. At the very least, an allowance
should be created with respect to the Jean Company note,
based upon the estimated probability of collection.
PROBLEM 9-10B
(a)
2000
1999
Current ratio
$782,878 ÷ $899,684
= 0.9:1
$1,133,906 ÷
$1,874,643
= 0.6:1
Acid test
$690,612 ÷ $899,684
= 0.8:1
$1,048,279 ÷
$1,874,643
= 0.6:1
(b)
2000
1999
Receivables
turnover
$4,210,313 ÷
$858,257
= 4.9 x
$4,160,167 ÷ $675,706
= 6.2 x
Collection
period
365 days ÷ 4.9
= 74.4 days
365 days ÷ 6.2
= 58.9 days
(c) Becker Milk’s short-term liquidity has improved slightly. The
current and acid test ratios both increased. However, the
receivables turnover is lower and the collection period is
longer. This could be the reason the current and acid test
ratios look ‘artificially’ better. Further investigation is
warranted before one should conclude on Becker Milk’s
liquidity.