ACCOUNTING FOR ALLOWANCE FOR DOUBTFUL ACCOUNTS
Problem 5-3 Jocose Company
Trans 1:
Trans 2:
Trans 3:
Cash
Accounts receivable
Sales
800,000
7,200,000
684,000
36,000
Trans 5:
Trans 6:
720,000 x 5% sales discount
Custom ers w/ discount = 7.2M credit sales x 10%
5,940,000
5,940,000
Sales discount
Allowance for sales discount
10,000
Sales return
Accounts receivable
80,000
Allowance for doubtful accts
Accounts receivable
60,000
Accounts receivable
Allowance for doubtful accts
10,000
Cash
10,000
10,000
This account is used bec the discount is still expected.
80,000
To record the writeoff.
60,000
To reestablish the account.
10,000
To record the collection.
Accounts receivable
Trans 7:
Gross sales = 800,000 ÷ 10% = 8,000,000
720,000 x 95% (net of discount)
720,000
Accounts receivable
Trans 4:
This represents 90% of gross sales (8M x 90%).
8,000,000
Cash
Sales discount
Accounts receivable
Cash
This represents 10% of gross sales.
10,000
Analysis of the Allowance for Doubtful Accounts
Allowance for Doubtful Accounts
100,000 beg
trans6
60,000
10,000 trans6
50,000 bef. adj.
?
DAE
?
end
To get the required ending balance, the % of AR is used.
The rate is not given so com pute it using the beginning balances.
Rate = beginning ADA ÷ beginning AR balance
= 100,000 ÷ 2,000,000 = 5%
beg
trans1
trans6
Accounts Receivable
2,000,000
7,200,000
720,000 trans2
5,940,000 trans3
10,000
9,210,000
end
80,000 trans5
60,000 trans6
10,000 trans6
6,810,000
Accounts receivable, ending
Loss percentage
Required allowance (ending ADA)
2,400,000
5%
120,000
Required allowance (ending ADA)
Less: ADA before adjustment (T-account)
Adjustment (increase in allowance)
120,000
50,000
70,000
Doubtful accounts expense
Allowance for doubtful accounts
70,000
2,400,000
Accounts receivable, ending
Less: Allowance for doubtful accounts
Less: Allowance for sales discount
Accounts receivable @ NRV
70,000
2,400,000
120,000
10,000
2,270,000
Problem 5-4 Relentless Company
Trans 1:
Cash
Accounts receivable
Sales
470,000
2,600,000
Cash
1,000,000
Cash (discount is already deducted)
Sales discount
Accounts receivable
Allowance for doubtful accts
Accounts receivable
1,455,000
45,000
This represents 3% of the receivable (1.5M x 3%).
1,455,000 collections ÷ 97% = 1,500,000
20,000
20,000
Refer to entry no. 1
Trans 6:
Sales return and allowances
Accounts receivable
55,000
Sales return and allowances
Cash
10,000
Accounts receivable
Allowance for doubtful accts
5,000
Cash
5,000
Accounts receivable
To record collections from custom ers w/ no disc.
This represents 97% of the receivable.
1,500,000
Trans 5:
Trans 8:
2,455,000
(1,455,000)
1,000,000
1,000,000
Accounts receivable
Trans 7:
Total sales 3,070,000 less 470,000 cash sales.
3,070,000
Trans 2&3: Analysis of transactions 2 and 3
Total cash received from credit customers
Cash received from customers w/ discount
Cash received from customers w/o discount
Trans 4:
Refer to transaction no. 5.
Since the return is from credit custom ers,
55,000
AR account is credited.
10,000
Since the return is from cash custom ers,
refunds are granted, so cash is credited.
5,000
To reestablish the account.
5,000
To record the collection.
Analysis of the Allowance for Doubtful Accounts & Doubtful Accounts Expense
Allowance for Doubtful Accounts
25,000 beg
trans4
20,000
5,000 trans8
10,000 bef. adj.
50,000 DAE
60,000 end
beg
Accounts Receivable
600,000
trans1
2,600,000
trans8
end
5,000
3,205,000
625,000
2,500,000
20,000
55,000
5,000
trans2
trans4
trans6
trans8
Since the percentage of sales m ethod is used,
the net credit sales is m ultiplied to the loss rate (2%).
The resulting figure is the DAE, not the ADA.
Credit sales
Less: sales discounts
2,600,000 trans 1
45,000 trans 2
Less: sales returns to credit customers
Net credit sales
Loss percentage
Doubtful accounts expense
55,000 trans 6
2,500,000
2%
50,000
ADA before adjustment
Doubtful accounts expense
ADA, ending balance
10,000
50,000
60,000
Doubtful accounts expense
50,000
2,580,000
Allowance for doubtful accounts
Accounts receivable, ending
Less: Allowance for doubtful accounts
Accounts receivable @ NRV
50,000
625,000
60,000
565,000
Problem 5-8 Paramount Company
Requirement 1: Compute the ADA balance before adjustment
Allowance for Doubtful Accounts
500,000 beg
note1
300,000
400,000 DAE 20M x 2%
note3
100,000
50,000 note2
550,000 bef. adj.
?
adj.
?
end required allowance
1: Accounts written off
Allowance for doubtful accts
300,000
Accounts receivable
2: Recoveries of accounts written off
Accounts receivable
50,000
Allowance for doubtful accts
Cash
50,000
Accounts receivable
3: Additional accounts written off
Allowance for doubtful accts
100,000
Accounts receivable
Requirement 2: Compute the required ADA balance at year-end
Classification
Nov to Dec
Jul to Oct
Jan to June
Prior Jan 1, 2020
Amount
5,000,000
2,000,000
1,000,000
400,000*
Total
8,500,000
Loss Rate
5%
10%
25%
75%
Allowance
250,000
200,000
250,000
300,000
1,000,000
*The additional account written off am ounting to 100,000 is already deducted.
Requirement 3:
Required allowance (ending ADA)
Less: ADA before adjustment (refer to T-account)
Adjustment: Increase in ADA and DAE
Doubtful accounts expense
Allowance for doubtful accounts
1,000,000
550,000
450,000
450,000
450,000
300,000
50,000
50,000
100,000
Problem 5-12 Delta Company
Problem 5-18 Easy Company
Requirement 1: Allowance for sales discount
Analysis of given data:
Analysis of data given:
All sales are credit sales, thus, total AR = total Sales.
2% discount is given to accounts paid w/n 15 days.
Accounts collectible in 0-15 days
Multiply: Sales discount rate
Available discount
Less: Discounts taken (40k x 50%)
Allowance for sales discount
2,000,000
2%
40,000
20,000
20,000 A
Year
2017
2018
2019
Amount
2,000,000
1,400,000
400,000
200,000
4,000,000
Loss
0%
5%
10%
50%
Allowance
70,000
40,000
100,000
210,000 B
Requirement 3: Net realizable value of AR
Accounts receivable, gross
4,000,000
Less: Allowance for sales discount
20,000
Less: Allowance for doubtful accts
210,000
Accounts receivable @ NRV
3,770,000
Writeoffs
Recoveries
260,000
22,000
295,000
37,000
300,000
36,000
855,000
95,000
The method to be used is the % of credit sales.
DAE = Credit sales x Loss Rate
Rate is based on the experience of 3 prior years.
Requirement 2: Allowance for doubtful accounts
Classification
0 - 15 days
16 - 30 days
31 - 60 days
Over 60 days
Total
Credit sales
11,100,000
12,250,000
14,650,000
38,000,000
Rate =
855,000 - 95,000
38,000,000
= 2%
Requirement 1: Doubtful Accounts Expense
DAE = 15,000,000 x 2% = 300,000
B
Requirement 2: Allowance for Doubtful Accounts
ADA, 01/01/2020
80,000
DAE for 2020
300,000
Writeoffs for 2020
Recoveries for 2020
ADA, 13/31/2020
(310,000)
40,000
110,000 A
C
Requirement 3: Net realizable value of AR
Accounts receivable, 01/01/20
2,070,000
Problem 5-17 Comprehensive Company
Same accounting procedure with Problem 5-8
1. ADA balance before adjustment
1,150,000
2. Required ending ADA
1,650,000
3. Doubtful accounts expense
900,000
4. Adjustment to ADA (increase)
500,000
5. Net realizable value of AR
8,250,000
B
A
C
D
B
Credit sales during the year
Collections during the year
Accounts written off, 2020
Recovered accounts, 2020
Collections of recoveries, 2020
Accounts receivable, 12/31/20
Less: ADA, 12/31/20
Accounts receivable @ NRV
15,000,000
(14,000,000)
(310,000)
40,000
(40,000)
2,760,000
110,000
2,650,000 A
Problem 5-19 Flappable Company
Problem 5-20 Sky Company
Requirement 1: Allowance for doubtful accounts
Post all the given information in their T-accounts.
Classification
30 days or less
31 - 60 days
61 - 180 days
181 - 1 year
Total
Amount
3,000,000
1,500,000
1,200,000
1,200,000
6,900,000
Loss
5%
20%
25%
50%
Allowance
150,000
300,000
300,000
600,000
1,350,000
Allowance for Doubtful Accounts
15,000 2019
writeoff
35,000
30,000 DAE
10,000 2020
A
A: This amount is squeezed from all given data.
Requirement 2: Doubtful Accounts Expense
Accounts Receivable
Compute for the ADA 01/01/2020 balance
DAE in prior years = 5% of credit sales
Credit sales (2017 to 2019)
23,500,000
Multiply: Loss rate
5%
Doubtful accounts expense
1,175,000
Writeoffs (2017 to 2019)
(200,000)
Recoveries (2017 to 2019)
75,000
ADA, 12/31/2019
1,050,000
2019
sales
2020
880,000
C: This amount is squeezed from all given data.
1,050,000
2020 Writeoffs (200k + 100k add'l)
2020 Recoveries
DAE for 2020 (squeezed)
ADA, 12/31/2020 (see aging table)
(300,000)
100,000
500,000 A
1,350,000
Requirement 3: Net Realizable Value of AR
6,900,000
1,350,000
5,550,000
35,000 writeoff
15,000 actual return
6,020,000 collection
ADA, 01/01/2020
Accounts receivable, 01/01/2020
Less: ADA, 12/31/2020
Accounts receivable @ NRV
800,000
6,150,000
C
Allowance for Sales Returns
25,000 2019
actual
15,000
10,000 estimated
20,000 2020
A: This amount is squeezed from all given data.
Requirement 4: Net Sales for 2020
Gross sales, 2020
Estimated sales return
6,150,000
(10,000)
Net sales, 2020
6,140,000 B
Problem 5-21
1 C This method favors the income statement because there is proper matching of revenue and expenses.
2 A This method emphasizes asset valuation because it presents AR at net realizable value.
3 A Percentage of receivable method allows AR to be presented at net realizable value.The
4 B When using the percentage of sales method, the resulting figure is the DAE and not the ADA.
5 C Only the cash and allowance account are affected when recovering accounts arlready written off.
6 D The resulting figure is the required ending balance of the allowance account.
7 A ADA is measured directly as a result of the aging table while DAE is just a result of the adjustment in ADA.
8 A Allowance method measures the doubtful accounts expense based on experience and estimates.
9 D Choices A to C are methods used to estimate doubtful accounts.
10 B DAE is the resulting figure so there is proper matching of sales and bad debt expense.