Recording and Adjusting
Receivables
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Ditzler Company, a construction
supply company, uses the
allowance method of accounting
for uncollectible accounts
receivable. Selected transactions
completed by Ditzler Company are
as follows:
Feb 1- Sold merchandise on account to
Ames Co., $8,000. The cost of the
merchandise sold was $4,500.
Feb 1 Accounts Receivable – Ames Co.
Sales
1 Cost of Merchandise Sold
Merchandise Inventory
Note: The merchandise is sold “on account”. This
means Accounts Receivable. The customer did
not pay for the merchandise.
8,000.00
8,000.00
4,500.00
4,500.00
• Mar 15 - Accepted a 60-day, 12 % note for
$8,000 from Ames Co. on account
Mar
15 Notes Receivable – Ames Co.
Accounts Receivable – Ames Co.
8,000.00
8,000.00
Note: Remember, only the note is recorded here.
The interest is not recorded until DUE in 60 days.
Also, this is the Accounts Receivable for Feb 1.
Thus, it is no longer Accounts Receivable. The
Accounts Receivable needs to be adjusted to zero
and the Notes Receivable needs to be recorded.
• Apr 9 – Wrote off a $2,500 account from
Dorset Co. as uncollectable
Apr
9
Allowance for Doubtful Accounts
Accounts Receivable – Dorset Co.
Note: The words “wrote off” mean a bad
debt. The company will not receive this
money.
2,500.00
2,500.00
• Apr 21 – Loaned $7,500 cash to Jill Klein,
receiving a 90-day, 14 % note.
Apr 21
Notes Receivable – Jill Klein
Cash
7,500.00
7,500.00
Note: This transaction is a Note Receivable.
• May 14 – Received the interest due from Ames Co. and
a new 90-day, 14 % note as a renewal of the loan.
(Record both the debit and the credit to the notes
receivable account)
May 14 Notes receivable – Ames Co.
Cash
Notes Receivable – Ames Co.
Interest Revenue
Note: This note replaces the note signed on Mar 15. The
interest of 12% is due and needs to be recorded. The 12%
interest would be $160. The $8,000 note is multiplied by
12% (.12). But the $960 answer is the interest for a year.
You only need 2 months for the answer. So, divide the $960
by 12 (to get 1 month) and then multiply by 2. [($8,000 X
.12) = $960/12 =$80 X 2 = $160]. The new 90 day note has
interest of 14% which will be computed and recorded in 90
days.
8,000.00
160.00
8,000.00
160.00
• June 13 – Reinstated the account of
Dorset Co., written off on April 9, and
received $2,500 in full payment.
June 13 Accounts Receivable – Dorset Co.
Allowance for Doubtful Accounts
13 Cash
Accounts Receivable – Dorset Co.
2,500.00
2,500.00
2,500.00
2,500.00
Note: The bad debt that was recorded on
Apr 9 is no longer bad. So you first need to
reverse the journal entry made on Apr 9
and then record the payment. This keeps
the books correct.
• July 20 – Jill Klein dishonored her note.
July 20
Accounts Receivable – Jill Klein
Notes Receivable – Jill Klein
Interest Revenue
Note: When a note is not paid on time it is dishonored
and no longer is a note. So the interest for the note is
computed and recorded as an Accounts Receivable, In
case you forgot how to figure the interest on a note, the
interest on Jill’s 90-day note would be computed as
follows: The 14% interest would be $262.50. The $7,500
note is multiplied by 14% (.14). But the $1050 answer is
the interest for a full year. You only need 3 months for
the answer. So, divide the $1050 by 12 (to get 1 month)
and then multiply by 3. [($8,000 X .14) = $1050/12
=$87.50 X 3 = $262.50].
7762.50
7,500.00
262.50
• Aug 12 – Received from Ames Co. the
amount due on its note of May 14.
Aug
12
Cash
Notes receivable – Ames Co.
Interest Revenue
8280.00
8,000.00
280.00
Note: Do you remember how to
figure the interest now? If not, go
back to slides for July 20 and/or May
14 for review.
• Aug 19 – Received from Jill Klein the amount
owed on the dishonored note, plus interest for
30 days at 15%, computed on the maturity value
of the note.
Aug
19 Cash
Accounts Receivable – Jill Klein
Interest Revenue
($7,762.50 * 15% * 30/360)
Note: Did you get the correct interest for
this one? If not, review the previous
interest computations. Remember,
practice makes perfect.
7859.53
7,762.50
97.03
• Dec 16 – Accepted a 60-day, 12 % note
for $12,000 from Global Company on
account.
Dec
16
Notes Receivable – Global Company
Accounts Receivable – Global Company
12,000.00
12,000.00
Note: Did you remember to record
just the note and not the interest?
Why do you not record the interest at
this time?
• Dec 31 – It is estimated that 3% of the
credit sales of $1,375,000 for the year
ended December 31st will be uncollectible.
Dec 31
Bad Debt Expense
Allowance for Doubtful Accounts
Uncollectable accounts estimate
($1,375,000 * 3%)
Note: Uncollectible receivable amounts are only
computed on credit sales. Cash sales (if there
are any) are subtracted before multiplying by the
% rate. Did you remember to change your 3% to
.03?
41,250.00
41,250.00
Feb
1
1
Mar
15
Accounts Receivable – Ames Co.
Sales
Cost of Merchandise Sold
Merchandise Inventory
Notes Receivable – Ames Co.
Apr
21
May
14
Accounts Receivable – Ames Co.
Allowance for Doubtful Accounts
Accounts Receivable – Dorset Co.
Notes Receivable – Jill Klein
Cash
Notes receivable – Ames Co.
13
Cash
Notes Receivable – Ames Co.
Interest Revenue
Accounts Receivable – Dorset Co.
Apr
June
9
12
Allowance for Doubtful Accounts
Cash
Accounts Receivable – Dorset Co.
Accounts Receivable – Jill Klein
Notes Receivable – Jill Klein
Interest Revenue
Cash
19
Notes receivable – Ames Co.
Interest Revenue
Cash
13
July
Aug
Aug
Dec
Dec
20
16
31
Accounts Receivable – Jill Klein
Interest Revenue
($7,762.50 * 15% * 30/360)
Notes Receivable – Global Company
Accounts Receivable – Global Company
Bad Debt Expense
Allowance for Doubtful Accounts
Uncollectable accounts estimate
($1,375,000 * 3%)
8,000.00
8,000.00
4,500.00
4,500.00
8,000.00
8,000.00
2,500.00
2,500.00
7,500.00
7,500.00
8,000.00
160.00
8,000.00
160.00
2,500.00
2,500.00
2,500.00
2,500.00
7762.50
7,500.00
262.50
8280.00
8,000.00
280.00
7859.53
7,762.50
97.03
12,000.00
12,000.00
41,250.00
41,250.00
Journalize the adjusting entry to record the
accrued interest on December 31 on the Global
Company note.
Dec 31
Interest Receivable
Interest Revenue
Accrued interest
($12,000 * 12% * 15/360)
60.00
60.00
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