CHAPTER 7: Cash and receivables learning objectives
1.
Understand cash and accounts receivable from a business perspective.
2.
Define financial assets and identify items that are considered cash and cash equivalents and how they
are reported.
3.
Define receivables and identify the different types of receivables from an accounting perspective.
4.
Account for and explain the accounting issues related to the recognition and measurement of accounts
receivable.
5.
Account for and explain the accounting issues related to the impairment in value of accounts
receivable.
6.
Account for and explain the accounting issues related to the recognition and measurement of shortterm notes and loans receivable.
7.
Account for and explain the accounting issues related to the recognition and measurement of longterm loans and loans receivable.
8.
Account for and explain the basic accounting issues related to the derecognition of receivables.
9.
Explain how receivables and loans are reported and analyzed.
10. Identify differences in accounting between IFRS and accounting standards for private enterprises
(ASPE), and what changes are expected in the near future.
11. Explain common techniques for controlling cash (Appendix 7A).
Financial Asset:
“Any asset that is:
(i) cash;
(ii) a contractual right to receive cash or another financial asset from another party;
(iii) a contractual right to exchange financial instruments with another party under conditions that are
potentially favourable to the entity; or
(iv) an equity instrument of another entity”
Liquidity is an indication of an enterprise's ability to meet its obligations as they come due.
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Cash is the most liquid asset. Cash includes coin, currency, bank deposits including chequing and savings
accounts, and negotiable instruments such as money orders, cashiers’ cheques, personal cheques, and
bank drafts. Petty cash funds and change funds should be included in cash.
Postdated cheques and I.O.U.s should be reported as receivables.
Travel advances to employees should be reported as receivables or as prepaid expenses.
Bank overdrafts should be reported as current liabilities. They are not offset against the cash account
unless there is available cash in another account at the same bank.
Restricted cash
a) Cash restricted for some special purpose (such as the retirement of bonds) is reported
separately in either the current asset section or the non-current asset section of the balance
sheet, depending on the date of availability or disbursement.
b) The IASB recommends that legally restricted deposits held as compensating balances against
borrowing arrangements should be reported separately in either the current asset section or
the non-current asset section, depending on whether the borrowing arrangement is a shortterm or long-term one.
Cash equivalents
This category includes items that are both (1) readily convertible to known amounts of cash, and (2) so
near their maturity that they present insignificant risk of changes in interest rates (generally 3 months or
less). Some certificates of deposit, money market funds, and treasury bills are nearly "equivalent to cash"
in terms of liquidity. Note for students that IFRS allows some equity investments, such as preferred shares
close to their redemption date to be included as a cash equivalent.
Receivables: Claims held against customers and others for money, goods, or services.
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They are classified as either trade or nontrade; either current or non-current.
1.
Accounts receivable are oral promises of the purchaser to pay for goods and services sold.
2.
Notes receivable are written-promises to pay a certain sum of money on a specified future date.
3.
Nontrade receivable include advances to employees (marketing staff go for tradeshows) or
subsidiaries and dividends and interest receivable.
1. Accounts Receivable—Recognition and Measurement Issues. These involve the concepts of timing
and measurement. Measurement is complicated by:
Trade discounts. These reductions from the list price are not recognized in the accounting records;
customers are billed net of trade discounts.
Cash discounts (sales discounts). These are inducements for prompt payment. Discuss the gross and
net methods of recording receivables.
Textbook: Illustration 7-3 (P.348) will demonstrate the differences between these two methods.
a) Gross method (more practical than the net method). Sales and receivables are recorded at the
gross amount. Sales discounts taken by customers are debited to the Sales Discounts account,
which is reported in the income statement as a reduction of sales. If an allowance account is
used with the gross method, the net effect would result in recognizing accounts receivable at
their realizable value as required by Section 3856.
(originally: Dr. A/R & Cr. Sales $1000, paid 2/10, Dr. cash 980 & Dr. Sales Discount 20 & Cr. A/R
1,000)
b) Net method. (Assume customer WILL take discount) Sales and receivables are recorded at
the net amount. Sales discounts not taken by customers are credited to the Sales Discounts
Forfeited account, which is reported in the other revenue section of the income statement.
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This method is consistent with the requirements of Section 3856.
(Originally: Dr. A/R & Cr. Sales 980, paid 2/10, Dr. Cash 980 & Cr. A/R 980, if NOT: Dr. Cash 1000 &
Cr. A/R 980 Cr. Forfeited Sales Discount 20)
3.
Interest element. Theoretically, receivables should be measured at their present value but
accountants have chosen to ignore the implicit interest element in receivables that are due within
one year.
Accounts Receivable—Valuation and Impairment Issues.
Receivables are valued at net realizable value (the net amount expected to be received in cash).
1.
Methods of accounting for uncollectible accounts:
a) Allowance method—At the end of each accounting period an estimate is made of expected
losses from uncollectible accounts. This estimate is debited to Bad Debt Expense and credited
to the Allowance for Doubtful Accounts. When the amount of BDE confirmed: Dr. BDE &. ADA
a) How to estimate such amount
b) Should we care ADA opening balance (either credit or debit balance)
b) Direct write-off method—When a specific account is determined to be uncollectible (which
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may not occur in the period of sale), Bad Debt Expense is debited and Accounts Receivable is
credited. This method is theoretically undesirable, because it: (never estimate any BDE until it
happens: book journal entry: Dr. BDE & Cr. A/R)
i)
makes no attempt to match revenues and expenses.
ii)
does not result in receivables being stated at net realizable value in the balance sheet.
ACCOUNTING FOR RECEIVABLES AND BAD DEBTS
The following amounts are entered in the T accounts below:
1.
Beginning balance of Accounts Receivable
2.
Beginning balance of Allowance for Doubtful Accounts
1. Credit sales
Accounts Receivable
Sales
4.
Collections on account
Cash
XXX
XXX
XXX
Accounts Receivable
5.
6.
7.
8.
XXX
Write-offs of uncollectible accounts
Allowance for Doubtful Accounts
Accounts Receivable
XXX
Year-end adjusting entry for bad debts
Bad Debt Expense
Allowance for Doubtful Accounts
XXX
XXX
XXX
Ending balance of Accounts Receivable
Ending balance of Allowance for Doubtful Accounts
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ACCOUNTS RECEIVABLE
1. Beginning
balance
3. Credit
sales
ALLOWANCE FOR DOUBTFUL ACCOUNTS
XXX
4. Collections
XXX
on account XXX
XXX
6. Year-end
adjusting entry
for bad debts
XXX
5. Write-offs of
uncollectible
accounts
XXX
5. Write-offs
of uncollectable
accounts
XXX
7. Ending
balance
2. Beginning
balance
XXX
8. Ending
balance
EXERCISE 7-11 (p.389)(Calculating Bad Debts and Preparing Journal Entries) The trial balance before
adjustment of Chloe Inc., which follows ASPE, shows the following balances:
(a) Give the entry for bad debt expense for the current year assuming:
1. The allowance should be 4% of gross accounts receivable.
2. Historical records indicate that, based on accounts receivable aging, the following percentages will not
be collected:
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3. Allowance for Doubtful Accounts is $1,950 but it is a credit balance and the allowance should be 4% of
gross accounts receivable.
4. Allowance for Doubtful Accounts is $1,950 but it is a credit balance and historical records indicate that
the same percentages in part 2. are to be used to determine the Allowance for Doubtful Accounts.
(b) From the perspective of an independent reviewer of Chloe’s trial balance, comment on the unadjusted
debit balance in Chloe’s allowance for doubtful accounts at year end.
(c) Assume Chloe reports under IFRS and has adopted IFRS 9. What should Chloe’s approach be for
determining its Allowance for Doubtful Accounts when considering “lifetime expected credit losses”? What
is meant by this concept? Would a percentage-of-sales approach be appropriate for determining the
Allowance for Doubtful Accounts under IFRS 9? Why or why not? How would Chloe’s approach to
accounting for sales returns differ under IFRS?
(a)
1.
Under allowance approach: two methods: one is Balance
Sheet method & another is Income Statement
method
4% of gross A/R = 0.04 * $105,000 = $4,200
Dr. Bad Debt Expense (4,200+1,950)
6,150
Cr. Allowance for Doubtful Account
6,150
(Under B/S method: we have to care: ADA balance)
Now: ADA have Debit $1,950 (instead of credit), implying
last year’s BDE is not enough = last year BDE was
under-estimated.
After this j/e ADA balance = $4,200
2.
Based on Aging of A/R = (0.01 * 36,000) + (0.05 * 48,000)
+ (0.12 * 12,200) + (0.18 * 8,800) = $5,808
ADA have Debit $1,950
Dr. Bad Debt Expense (5,808+1,950)
Cr. Allowance for Doubtful Account
7,758
7,758
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3.
Same as a(1) (4% on A/R) but now ADA have CREDIT $1,950
Since Cr. 1950 in ADA opening balance =. Last year was overestimated
Dr. Bad Debt Expense (4200-1,950)
2250
Cr. Allowance for Doubtful Account
2250
After this j/e, the ADA balance = a 1 = $4200
4.
Same as a2 but ADA have Credit $ 1950
Dr. Bad Debt Expense (5,808-1,950)
3,858
Cr. Allowance for Doubtful Account
3,858
After this j/e, ADA balance = a2 = $5,808 credit balance
5) if next year’s BDE = 2% on credit sales ( income statement approach does NOT care about ADA balance)
Dr. Bad Debt Expense ( $684,000 – 30,000) * 0.02
Cr.
Allowance
for
13,080
Doubtful
Accounts
13,080
(We need Net credit sales = total sales – cash sales – sales discounts – sales return/ allowances)
(b) An unadjusted debit balance in allowance for doubtful accounts at year end is a result, in general, of
write-offs during the year exceeding the total of beginning credit balance in allowance for doubtful accounts,
plus the current year bad debt expense accrual. As an independent reviewer of Chloe’s financial statements,
we can note that a bad debt expense accrual in the current year is needed to ensure there is a sufficient
credit balance in the allowance for doubtful accounts at the end of the year. We would want to ensure that
accounts receivable (net) is valued at net realizable value on the balance sheet.
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(c ) When an entity assesses lifetime expected credit losses, it should examine at all possible default events
over the life of the accounts receivable.
It would use information available at the reporting date to evaluate
a range of possible outcomes (based on past events, current conditions, and forecasts of future economic
conditions) and their probability of occurring.
The allowance method examines the composition of the receivables at the reporting date. A percentageof-sales approach relies on historical bad debt losses only and may not reflect all of the expected credit
losses. If a percentage-of-sales approach is used during the accounting period, the allowance method should
be applied at the reporting date to further examine the make-up of the receivables at that time. Using the
percentage-of-sales approach would only be appropriate if there is also an assessment of the year-end
receivables to ensure that the Allowance account is appropriate (a mix of procedures). An adjustment may
be needed to the account with the offsetting debit or credit being made to Bad Debt Expense.
Chloe uses an allowance method and the approach used in #2 and #4 are likely best, as the aging information
should provide more information to assess collectability. Chloe would also want to ensure that information
on current and forecasted conditions (considering factors like industry and geographic conditions) are also
assessed in reviewing the receivables at the reporting date. This approach would be more consistent with
IFRS 9 where impairment represents "expected credit losses resulting from all possible default events" (that
is, more consistent with an expected loss model).
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2. Notes Receivable—Valuation Issues. The present value of the future cash flows is the proper amount to
record for notes.
1.
Review the basic terminology in accounting for notes: face value, stated interest rate, effective
(market) rate of interest, present value, discount on notes receivable, premium on notes
receivable, net carrying amount of the note, amortization, and effective interest method.
2.
Notes Bearing Interest Equal to the Effective Rate—The interest element is ignored for shortterm notes and therefore they are carried at face value. However, long-term notes are recorded at
the present value of the cash expected to be collected.
3.
Zero Interest or Unreasonable Interest-Bearing Notes—An appropriate rate of interest must be
determined in order to compute the present value of the note.
a) The present value of the note can be determined by measuring the fair market value of the
cash or other property, goods, and services exchanged for the note.
b) If the fair market value of the note or other property is not determinable, an interest rate may
be imputed on the basis of the issuer’s credit standing, collateral, etc.
ILLUSTRATION 7-3: INTEREST INCOME ON INTEREST-BEARING AND NON-INTEREST-BEARING NOTES
RECEIVABLE
COMPANY A: Lends Company C $20,000 July 1, 2017 in exchange for a 2-year note that pays interest at a
stated rate of 10% semi-annually on Jan. 1 and July 1. The market rate of interest for a similar note is
also 10%. Company B has a December 31 year end.
COMPANY B: purchases a six-month $20,000 note for $19,231 on March 15. The note matures on Sept 15
and was purchased to yield an 8% return.
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COMPANY A
COMPANY B
July 1, 2017
Note receivable
Cash
To record purchase
March 15
Note receivable
Cash
To record purchase
$20,000
December 31, 2017
Interest receivable
$1,000
Interest Revenue
Accrue semi-annual interest
[$20,000 × 10% × ½]
$20,000
$1,000
$19,231
$19,231
Sept 15
Cash
$20,000
Note receivable
$19,231
Interest revenue
$769
To record proceeds on maturity
Jan 1, 2018
Cash
$1,000
Interest receivable
$1,000
To record payment of accrued interest
July 1, 2019
Cash
$21,000
Notes receivable
$20,000
interest revenue
$1,000
To record payment of note at maturity
_____________________________________________________________________________
EXERCISE 7-13 (P.389)
E7-13 (Interest-Bearing and Non–Interest-Bearing Notes) Little Corp. was experiencing cash flow problems
and was unable to pay its $105,000 account payable to Big Corp. when it fell due on September 30, 2017.
Big agreed to substitute a one-year note for the open account. The following two options were presented
to Little by Big Corp.: Final
Option 1: A one-year note for $105,000 due September 30, 2018. Interest at a rate of 8% would be payable
at maturity. Option 2: A one-year non–interest-bearing note for $113,400. The implied rate of interest is
8%.
Assume that Big Corp. has a December 31 year end.
(a) Assuming Little Corp. chooses Option 1, prepare the entries required on Big Corp.’s books on
September 30, 2017, December 31, 2017, and September 30, 2018.
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(b) Assuming Little Corp. chooses Option 2, prepare the entries required on Big Corp.’s books on
September 30, 2017, December 31, 2017, and September 30, 2018.
(c) Compare the amount of interest income earned by Big Corp. in 2017 and 2018 under both options.
Comment briefly.
(d) From management’s perspective, does one option provide better liquidity for Big at December 31,
2017? Does one option provide better cash flows than the other?
(a)
Interest bearing note – Option 1:
September 30, 2017
Note Receivable
Account Receivable.
Dec 31, 2017
Interest Receivable ( I= PRT = $105,000 * 0.08 * 3/12)
Interest Income
Sep 30, 2018
Cash (105,000+ 2100+ 6300)
Note Receivable
Interest Receivable
Interest Income ($105,000* 0.08 * 9/12)
(b)
$105,000
$105,000
2,100
2,100
113,400
105,000
2,100
6,300
Non-interest bearing note – Option 2:
Sep 30, 2017
Note Receivable
Accounts Receivable
Dec 31, 2017
Note Receivable
($105,000*0.08*3/12)
Interest Income
105,000
105,000
2100
2,100
(As of year end, Note Receivable balance = 105,000+2100= $107,100)
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Sep 30, 2018
Note Receivable (9/12 * $105,000*0.08)
Interest Income
( the balance of Note Receivable = $107,100 + 6,300 = $113,400)
Cash
6,300
6,300
113,400
Note Receivable
(c)
113,400
There is no difference in the amount of interest income earned in 2017 and 2018 because both
options bear interest at 8%. The “non-interest bearing” note has the interest included in the face
amount of the note and is journalized to account for this. The actual interest earned is the same
under both options.
(a)
The liquidity of Big Corp. at December 31, 2017 will remain unchanged whichever option is selected.
Under option 1, the note balance remains at $105,000 but interest receivable of $2,100 results in a
total of $107,100 under current assets. Under Option 2, the balance of the note, after recording the
accrual of interest income is also $107,100 under current assets. The cash flows will also be the same
under both options as the amount collected at the maturity of the note is $113,400.
_________________________________________________________________________________
Accounts and Notes Receivable—Derecognition Issues
In order to accelerate the receipt of cash from receivables, they may be transferred to a third party for
cash.
1.
Secured borrowing (Assigning or Pledging). The owner of the receivables borrows cash from a
bank or another company by designating the accounts receivable as collateral.
a) The borrower and lender agree as to the specific accounts that serve as security. The assignor
(borrower) typically makes collections on the assigned accounts and remits the collections
plus a finance charge (interest cost) to the lender.
b) The borrower also recognizes all discounts, returns and allowances, and bad debts.
2.
Sale (factoring). These transfers of receivables may be without recourse or with recourse.
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ILLUSTRATION 7-4: SALE (FACTORING) OF RECEIVABLES
Accounts Receivable Are Transferred
Transfer without
Recourse
Report as Sale
Reduce Receivable
Record Gain or Loss
Transfer with Recourse
Does it meet three conditions?
1. Transferor surrenders benefits
2. Transferor's obligation can be
reasonably estimated
3. Transferee cannot require
repurchase.
YES
Report as Sale
Reduce receivable
Increase Liability
NO
Report as
Secured
Borrowing
Record Gain or Loss
Record Interest Expense
a) Transfer without recourse: The purchaser assumes the risk of collectibility and absorbs the
credit losses. This is an outright sale of receivables both in form and substance. A loss on the
sale is recognized for the excess of the face amount of the receivables over the cash proceeds.
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i)
A Due From Factor account (reported as a receivable) is used to account for any proceeds
retained by the factor to cover probable sales discounts, sales returns, and sales
allowances.
ii)
Derecognize the receivables.
iii) The factor maintains a corresponding “Due To” account (reported as a liability).
b) Transfer with recourse. The seller guarantees payment to the purchaser for those receivables
that become uncollectible.
A controversy exists as to whether these transfers should be recorded as a sale (with
recognition of gain or loss) or as a collateralized borrowing (with recognition of a liability
and accounting standards governing the derecognition of financial assets are not yet
finalized.
If the transfer with recourse does not meet these conditions, the transfer should be
accounted for as a secured borrowing and a liability is recorded.
EXERCISE 7-19 (P.391) Final
E7-19 (Transfer of Receivables with Recourse) Chessman Corporation factors $600,000 of accounts
receivable with Liquidity Financing, Inc. on a with recourse basis. Liquidity Financing will collect the
receivables. The receivable records are transferred to Liquidity Financing on August 15, 2017. Liquidity
Financing assesses a finance charge of 2.5% of the amount of accounts receivable and also reserves an
amount equal to 5.25% of accounts receivable to cover probable adjustments. Chessman prepares financial
statements under ASPE.
(a) Prepare the entries required on Myo’s books to record the sale, annual adjusting entry, and
collection of the full face value of the note.
(b) Assume that on the note’s maturity date, Khin informs Myo that it is having cash flow problems
and can only pay Myo 80% of the note’s face value. After extensive discussions with Khin’s
management, Myo’s credit and collections department considers the remaining balance of the note
uncollectible. Prepare the entry required on Myo’s books on the note’s maturity date.
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(c) What else could Myo have done to decrease collection risk related to the sale to Khin?
(a)
To be recorded as a sale under ASPE, all of the following conditions must be met:
1.
The transferred assets have been isolated from the transferor (put beyond
reach of the transferor and its creditors even in bankruptcy or
receivership).
2.
The transferee has obtained the right to pledge or to sell either the transferred
assets or beneficial interests in the transferred assets.
3.
(b)
The transferor does not maintain effective control over the transferred
assets through an agreement to repurchase or redeem them before their
maturity.
Calculation of net proceeds:
Cash = (100% - 2.5% - 5.25%) = 92,25% of A/R
=0.9225 * $600,000
553,500
Due from Factor (5.25%)
31,500
585,000
Recourse fair value (given)
6,000
579,000
Calculation of gain or loss:
A/R book value
600,000
Proceeds
(579,000)
Loss
21,000
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The following journal entry would be recorded on August 15, 2017:
Cash
533,500
Due from factor
31,500
Loss from sale of A/R
21,000
(c)
Accounts Receivable
60,000
Recourse Liability
6,000
Factoring the accounts receivable will improve the accounts receivable turnover ratio, if it were
calculated on August 15, 2017, immediately after recording the entry in (b) above. The balance of
accounts receivable used in the denominator will be reduced by the average of $600,000 and any
amounts factored at the other date(s) used in determining the average accounts receivable, thereby
making the ratio higher. If, on the other hand, the calculation is made well after the factoring
transaction, for example, at the fiscal year end, the balances of sales and average accounts receivable
would be unaffected by this transaction and therefore the accounts receivable turnover ratio would
not be affected.
(b)
If the entity prepares financial statements under IFRS, the following conditions are used to indicate
whether treatment as a sale is appropriate. The receivable is considered transferred
(treatment as
a sale is appropriate) if:
1. The entity transfers the contractual rights to receive cash flows from the receivable; or
2. Retains the contractual rights to receive cash flows from the receivable, but has a contractual
obligation to pay the cash flows to one or more recipients. In addition, three conditions must be
met:
i.
The entity has no obligation to pay amounts to the eventual recipients unless it collects
equivalent amounts from the original receivable.
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ii.
The entity is prohibited by the terms of the transfer contract from selling or pledging the
original asset other than as security to the eventual recipients for the obligation to pay
them cash flows.
iii.
The entity has an obligation to remit any cash flows it collects on behalf of the eventual
recipients without material delay.
In this situation, Cheesman has factored receivables with recourse meaning it is responsible for payment if
the customer does not pay. This would mean that the criteria of #2 i above
has not been met and the receivable has not been transferred. Therefore, the receivables would remain
on the books of Cheesman and a liability would be recorded for the amount borrowed.
________________________________________________________________________
Bank Reconciliations
1.
Two forms of bank reconciliations may be prepared:
a) Reconciliation from the bank statement balance to the book balance or vice versa.
b) Reconciliation of bank and book balances to the corrected cash balance.
i)
ii)
This form consists of two separate sections:

Balance per bank statement section.

Balance per books section.
This is the form illustrated in the text. It is useful, because it facilitates calculation of the
correct cash balance, which is the amount that should be reported on the balance sheet.
BANK RECONCILIATION
Balance per bank statement
$xxx
Add: Deposits recorded by business but not by bank
(Example:
Deposits in transit)
Deduct: Charges recorded by business but not by bank
(Example:
(xxx)
Outstanding cheques)
Corrected balance
Balance per books
xxx
$ XXX
$xxx
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Add: Deposits recorded by bank but not by business
(Example:
xxx
Note collection)
Deduct: Charges recorded by bank but not by business
(Examples:
(xxx)
Service charges, NSF cheques)
Corrected balance
$ XXX
Note: Information recorded by the bank but not the business will have to be recorded by journal entries
(such as bank charges).
a) Balance per bank statement section.
i)
The "balance per bank statement" is the amount shown on the most recent bank
statement as of the bank's closing date for the month.
ii)
Add deposits recorded in the company's books but not yet credited by the bank (e.g.,
deposits in transit).
iii) Deduct charges recorded in the company's books but not yet recorded by the bank (e.g.,
outstanding cheques).
b) Balance per books section.
i)
The balance per books is the amount shown in the company's cash or cash in chequing
account general ledger account as of the desired reconciliation date (i.e., as of the
balance sheet date, the month-end date, or whatever date for which it is desired to
calculate the correct cash balance).
ii)
Add deposits credited by the bank but not yet recorded by the company (e.g., collection
of notes, interest earned on interest-bearing chequing accounts, etc.).
iii) Deduct charges recorded by the bank but not yet recorded by the company (e.g., service
charges, NSF cheques, etc.).
c)
Both sections end with the correct cash balance, which is the amount that should be reported
on the balance sheet.
d) Every reconciling item that appears in the balance per books section requires an adjusting
entry to bring the books to the correct cash balance.
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(a) For situation 1, Atlantic estimates its bad debt expense to be 1.5% of net sales. Determine its bad debt
expense for 2017.
(b) For situation 2, what is the net realizable value of Central Corp.’s receivables at December 31, 2017?
(c) For situation 3, what is the balance in Allowance for Doubtful Accounts at December 31, 2017?
(d) For situation 4, what is the balance in Accounts Receivable at December 31, 2017, before subtracting
the allowance
for doubtful accounts?
(e) For situation 5, if doubtful accounts are 7% of accounts receivable, what is the bad debt expense
amount to be reported for 2017?
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P7-4 From its first day of operations to December 31, 2017, Campbell Corporation provided for
uncollectible accounts receivable under the allowance method: entries for bad debt expense were made
monthly based on 2.5% of credit sales, bad debts that were written off were charged to the allowance
account, recoveries of bad debts previously written off were credited to the allowance account, and no
year-end adjustments were made to the allowance account. Campbell’s usual credit terms were net 30
days, and remain unchanged.
The balance in Allowance for Doubtful Accounts was $184,000 at January 1, 2017. During 2017, credit sales
totalled $9.4 million, interim entries for bad debt expense were based on 2.5% of credit sales, $95,000 of
bad debts were written off, and recoveries of accounts previously written off amounted to $15,000.
Campbell upgraded its computer facility in November 2017, and an aging of accounts receivable was
prepared for the first time as at December 31, 2017. A summary of the aging analysis follows:
Based on a review of how collectible the accounts really are in the “Before January 1, 2017” aging category,
addi- tional receivables totalling $69,000 were written off as at December 31, 2017. The 60% uncollectible
estimate therefore only applies to the remaining $81,000 in the category. Finally, beginning with the year
ended December 31, 2017, Campbell adopted a new accounting method for estimating the allowance for
doubtful accounts: it now uses the amount indicated by the year-end aging analysis of accounts receivable
which provides its best estimate of “expected credit losses resulting from all possible default events.”
Instructions
(a) Prepare a schedule that analyzes the changes in Allowance for Doubtful Accounts for the year
ended December 31, 2017. Show supporting calculations by preparing a provision matrix in good form.
(Hint: In calculating the allow- ance amount at December 31, 2017, subtract the $69,000 write off of
receivables.)
(b) Prepare the journal entry for the year-end adjustment to the Allowance for Doubtful Accounts
balance as at December 31, 2017.
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