CHAPTER 9
Accounting for Receivables
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
1.
Identify and distinguish between the
different types of receivables.
2.
Show how accounts receivable are
recognized in the accounts.
Questions
Brief
Exercises
1, 2
1
Exercises
Problems
Set A
Problems
Set B
3
2
1
1, 6, 7, 8
1, 6, 7, 8
3. Describe and use the methods and
bases used to value accounts
receivable.
4, 5, 6, 7, 8
3, 4, 5, 6,
11
2, 3, 4
1, 2, 3, 4,
5, 6
1, 2, 3, 4,
5, 6
4.
Determine the entries to record the
disposition of accounts receivable.
9, 10, 11
7
5, 6, 10
8, 9
8, 9
5.
Determine the interest on notes
receivable.
12
8, 10
7, 8, 9
8, 9
8, 9
6.
Show how notes receivable are
recognized in the accounts.
13
9, 10
7, 8
8, 9
8, 9
7.
Demonstrate how notes receivable are
valued.
8, 9
8, 9
8.
Determine the entries to record the
disposition of notes receivable.
14
10
9
8, 9
8, 9
9.
Illustrate the statement presentation of
receivables.
15
3, 11
10, 11
7, 9
7, 9
16, 17
12
12
10
10
10. Evaluate short-term liquidity.
9-1
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Prepare journal entries related to bad debts expense.
Simple
20-30
2A
Calculate bad debts amounts using various methods.
Simple
15-25
3A
Journalize transactions related to bad debts using ageing
schedule.
Moderate
20-30
4A
Calculate bad debts and journalize transactions using an
ageing schedule.
Moderate
15-25
5A
Journalize transactions related to bad debts using
percentage of sales.
Moderate
15-25
6A
Analyse accounts and prepare journal entries for
receivables and bad debts.
Complex
15-25
7A
Determine missing amounts related to sales and accounts
receivable.
Complex
15-25
8A
Prepare entries for various receivables transactions.
Moderate
35-45
9A
Prepare entries for various notes receivable transactions.
Show balance sheet presentation.
Moderate
35-45
10A
Calculate ratios to evaluate short-term liquidity.
Moderate
15-25
1B
Prepare journal entries related to bad debts expense.
Simple
20-30
2B
Calculate bad debts amounts using various methods.
Simple
15-25
3B
Journalize transactions related to bad debts using ageing
schedule.
Moderate
20-30
4B
Calculate bad debts and journalize transactions using an
ageing schedule.
Moderate
15-25
5B
Journalize transactions related to bad debts using
percentage of receivables.
Moderate
15-25
6B
Analyse accounts and prepare journal entries for
receivables and bad debts.
Complex
15-25
7B
Determine missing amounts related to sales and accounts
receivable.
Complex
15-25
8B
Prepare entries for various receivables transactions.
Moderate
35-45
9B
Prepare entries for various notes receivable transactions.
Show balance sheet presentation.
Moderate
35-45
10B
Calculate ratios to evaluate short-term liquidity.
Moderate
15-25
9-2
BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material
Study Objective
1. Identify and
distinguish between
the different types of
receivables.
Knowledge
Q9-2
BE9-1
2. Show how accounts
receivable are
recognized in the
accounts.
Comprehension
Q9-1
Application
Analysis
Q9-3
BE9-2
E9-1
P9-1A
P9-8A
P9-1B
P9-8B
Q9-8
BE9-3
BE9-4
BE9-5
BE9-6
BE911
E9-2
E9-3
E9-4
BE9-7
E9-5
E9-10
P9-8A
P9-6A
P9-7A
P9-6B
P9-7B
3. Describe and use the
methods and bases
used to value
accounts receivable.
Q9-5
Q9-4
Q9-6
Q9-7
4. Determine the entries
to record the
disposition of
accounts receivable.
Q9-10
Q9-9
Q9-11
E9-6
5. Determine the
interest on notes
receivable.
6. Show how notes
receivable are
recognized in the
accounts.
Q9-12
BE910
E9-7
E9-8
E9-9
BE9-9
BE910
E9-7
E9-8
P9-8A
P9-8A
P9-9A
P9-8B
P9-9B
BE910
E9-9
P9-8A
Q9-13
7. Demonstrate how
notes receivable are
valued.
8. Determine the entries
to record the
disposition of notes
receivable.
Q9-14
9. Illustrate the
statement
presentation of
receivables.
Q9-15
10. Evaluate short-term
liquidity.
BE9-11
E9-10
E9-11
P9-9A
P9-9B
Q9-17
BE9-12
Q9-16
Broadening Your
Perspective
BYP9-2
BYP9-3
9-3
P9-1A
P9-2A
P9-3A
P9-4A
P9-5A
P9-1B
P9-2B
P9-3B
P9-4B
P9-5B
P9-9A
P9-8B
P9-9B
P9-6A
P9-6B
P9-8A
P9-9A
P9-8B
P9-9B
BE9-8
Synthesis
Evaluation
BYP9-5
BYP9-6
P9-9A
P9-8B
P9-9B
P9-9A
P9-8B
P9-9B
P9-7A
P9-7B
E9-12
P9-10A
P9-10B
BYP9-1
BYP9-4
ANSWERS TO QUESTIONS
01. The three major types and classification
follows:
Type
(1) Accounts receivable
(2) Notes receivable
(3) Other receivables
of receivables are as
Classification
Current asset
Current or noncurrent
depending on due date
Current or noncurrent
depending on due date
asset
asset
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 ................................................................
50
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.
(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
9-4
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.
2,300
The first entry is made to reverse write-off of the account receivable.
The second entry records the collection of the account.
9-5
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]
9-6
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
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.
9-7
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
9-8
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 ................................................ 14,000
Sales ...................................................................
Sales Returns and Allowances ................................
Accounts Receivable .........................................
14,000
3,800
3,800
Cash ........................................................................... 10,200
Accounts Receivable ($14,000 – $3,800) ..........
10,200
BRIEF EXERCISE 9-3
April 30 Bad Debt Expense [($800,000 – $50,000) X 2%] ...... 15,000
Allowance for Doubtful Accounts ....................
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
9-9
4,800
BRIEF EXERCISE 9-5
(a) Jan. 24 Allowance for Doubtful Accounts ....................
Accounts Receivable ..................................
7,000
7,000
(b)
(1)
(1) Before Write-Off (2) After Write-Off
Accounts receivable
Allowance for doubtful accounts
Net realizable value
$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.................................................................
9-10
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 ................................................... 10,000
Accounts Receivable ......................................
10,000
Cash ........................................................................ 10,175
Notes Receivable ............................................
Interest Revenue ($10,000 x 7% x 3/12) .........
10,000
175
Notes Receivable ................................................... 10,000
Accounts Receivable ......................................
10,000
Accounts Receivable ............................................. 10,175
Notes Receivable ............................................
Interest Revenue ($10,000 x 7% x 3/12) .........
10,000
175
Notes Receivable ................................................... 10,000
Accounts Receivable ......................................
10,000
Allowance for Doubtful Notes ............................... 10,000
Notes Receivable ............................................
10,000
9-11
BRIEF EXERCISE 9-11
(a) Feb. 28 Bad Debts Expense ........................................... 36,000
Allowance for Doubtful Accounts..............
(b)
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
9-12
$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
5,000
5,000
Accounts Receivable—Giger .......................... 11,000
Sales ..........................................................
Cash ..................................................................
Accounts Receivable—Giger ...................
6,000
Accounts Receivable—Giger ..........................
Interest Revenue.......................................
[2% X ($11,000 – $6,000)]
100
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
9-13
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 ...........
($8,810 – $1,800)
7,010
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
7,010
EXERCISE 9-4
2002
Dec. 31
2003
May 11
June 12
12
9-14
8,000
1,100
1,100
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
14.40
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).
9-15
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
9-16
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 ....................................... 15,000
Sales ..........................................................
20 Cash ($4,500 – $225) ........................................
Credit Card Expense ($4,500 X 5%) ................
Sales ..........................................................
30
Feb. 10
15
Cash ($1,000 - $30) ...........................................
Debit Card Expense ($1,000 X 3%) ..................
Sales ..........................................................
15,000
4,275
225
4,500
970
30
1,000
Cash .................................................................. 12,000
Accounts Receivable................................
Accounts Receivable ($3,000 X 18% x 1/12) ...
Interest Revenue.......................................
4,000
12,000
45
45
(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.
9-17
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.
9-18
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)
Allowance for Doubtful Accounts
50,000
2,800,000
90,000
25,000
9-19
(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
9-20
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.
9-21
PROBLEM 9-3A
(a) Dec. 31
Bad Debts Expense .......................................... 16,050
Allowance for Doubtful Accounts ...........
Estimated bad debts
Less: Unadjusted balance
Adjustment required
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
Ref.
Debit
Credit

Balance
Adjusting entry
16,050
09,000
25,050
00,1,000
24,050
25,050
1,000
9-22
Balance
PROBLEM 9-3A (Continued)
(b)
1.
2.
Mar. 1
May
1
1
Allowance for Doubtful Accounts ...................
Accounts Receivable................................
1,000
Accounts Receivable .......................................
Allowance for Doubtful Accounts ...........
1,000
Cash ..................................................................
Accounts Receivable................................
1,000
1,000
1,000
1,000
(c)
Dec. 31
Bad Debts Expense .......................................... 12,050
Allowance for Doubtful Accounts ...........
($37,100 - $25,050)
9-23
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
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.
9-24
PROBLEM 9-5A
(a) Bad Debts Expense (3% X $1,000,000) ......................
Allowance for Doubtful Accounts ......................
30,000
30,000
(b) Allowance for Doubtful Accounts..............................
Accounts Receivable ..........................................
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 ...........................................................
37,000
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.
9-25
PROBLEM 9-6A
Yr. 1 Balance
Sales
Yr. 2 Balance
Write-offs
Accounts Receivable
8,300,000
28,500,000
Write-offs
Collections
9,500,000
Allowance for Doubtful Accounts
Yr. 1 Balance
Bad debts
105,000
Yr. 2 Balance
Year 2
Bad Debts Expense ...........................................
Allowance for Doubtful Accounts ..........
Accounts Receivable .........................................
Sales ........................................................
105,000
27,195,000
750,000
285,000
930,000
285,000
285,000
28,500,000
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……….. .......................................................
Accounts Receivable ..............................
27,195,000
27,195,000
($8,300,000 + $28,500,000 – $105,000 – $9,500,000 = $27,195,000)
9-26
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
9-27
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
9-28
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
8,000
80
6,900
Cash ($750 – $26.25) ........................................ 723.75
Credit Card Expense ($750 X 3.5%) ................
26.25
Sales ..........................................................
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
9-29
750.00
485
8,000
80
80
90
PROBLEM 9-9A (Continued)
(b)
Notes Receivable
Date
Oct.
Explanation
1
1
31
Ref.
Debit
Credit
Balance
8,000
8,000
28,000
20,000
12,000
Credit
Balance

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 ..........................................
9-30
$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
8,000
80
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.
9-31
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.
9-32
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
9-33
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.
9-34
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 Adjusting
Allowance for Doubtful Accounts
Date
Explanation
2002
Dec. 31 Balance
31 Adjusting
2003
Mar. 31
May 31
Ref.
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)
9-35
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%
$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
$25,000
10%
$2,500
20,300
5,000
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.
9-36
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 ..................
9-37
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 .....................................................
9-38
$ 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
Write-offs
Accounts Receivable
4,100,000
22,500,000
Write-offs
Collections
4,800,000
Allowance for Doubtful Accounts
Yr. 1 Balance
Bad debts
150,000
Yr. 2 Balance
150,000
21,650,000
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)
9-39
PROBLEM 9-7B
(a)
Sales
Cost of goods sold
Gross profit on sales
Total sales
Cash sales
Credit sales
(b)
?
66,000
31,000
= $97,000 ($31,000 + $66,000)
= 18,000
= $79,000
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
9-40
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
9-41
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.
9-42
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
9-43
6,000
120
6,200
700
415
4,800
44
44
75
PROBLEM 9-9B (Continued)
(c)
Notes Receivable
Date
Explanation
July 1
Balance
1
31
Accounts Receivable
Date
Explanation
July 5
16
31
Interest Receivable
Date
Explanation
July 1
Balance
1
31
31
Adjusting entry
Ref.

Debit
Credit
6,000
4,800
Balance
20,800
14,800
10,000
Ref.
Debit
6,200
415
4,888
Credit
Balance
6,200
6,615
11,503
Ref.

Debit
Credit
Balance
164
44
0
75
120
44
75
(d)
OUELLETTE CO.
Balance Sheet (partial)
July 31, 2003
Assets
Current assets
Notes receivable...............................................................
Accounts receivable ........................................................
Interest receivable............................................................
Total current assets .................................................
9-44
$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.
9-45
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 ÷ $675,706
= 6.2 x
Collection period
365 days ÷ 4.9
= 74.4 days
365 days ÷ 6.2
= 58.9 days
(c) Becker Milk’s short-term liquidity has improved slightly. The current
and acid test ratios both increased. However, the receivables
turnover is lower and the collection period is longer. This could be
the reason the current and acid test ratios look ‘artificially’ better.
Further investigation is warranted before one should conclude on
Becker Milk’s liquidity.
9-46
BYP 9-1 FINANCIAL REPORTING PROBLEM
(a)
($ in thousands)
2000
1999
Acid test ratio
$1,446 + $2,294 = 0.6:1
$6,405
$20,942 + $2,494 = 3.6:1
$6,451
Receivables turnover
$20,844
[$2,294 + $2,494) ÷ 2]
= 8.7 x
$21,465
[($2,494 + $7,196) ÷ 2]
= 4.4 x
Collection period
365 days = 41.9 days
8.7
365 days = 82.9 days
4.4
(b) The acid test ratio decreased significantly from 1999 to 2000. The
receivables turnover increased substantially, and the average
collection period decreased correspondingly, from 1999 to 2000.
9-47
BYP 9-2 INTERPRETING FINANCIAL STATEMENTS
(a)
($ in thousands)
1999
1998
Current ratio
$95,746 ÷ $56,862
= 1.7:1
$113,797 ÷ $71,817
= 1.6:1
Acid test ratio
$37,429 ÷ $56,862
= 0.7:1
$31,135 ÷ $71,817
= 0.4:1
(b)
($ in thousands)
1999
1998
Receivables
turnover
$302,392
[$29,955 + $30,776) ÷ 2]
= 9.9 x
$291,655
[$30,776 + $23,379) ÷ 2]
= 10.8 x
Collection period
365 days ÷ 9.9
= 36.9 days
365 days ÷ 10.8
= 33.8 days
(c) High Liner Foods does an adequate job of managing its receivables.
However, it appears the management’s performance has deteriorated
in 1999 compared to the previous year. Its average collection period of
34 days in 1998 and 37 days in 1999 is longer than its credit terms of 7
to 30 days.
(d) The same allowance for doubtful accounts appears reasonable. If there
was a significant difference in credit risk in the separate locations, this
should have been disclosed in the notes to the financial statements.
9-48
BYP 9-3 ACCOUNTING ON THE WEB
Due to the frequency of change with regard to information available on the
world wide web, the Accounting on the Web cases are updated as
required. Their suggested solutions are also updated whenever necessary,
and can be found on-line in the Instructor Resources section of our home
page [www.wiley.com/canada/weygandt2].
9-49
BYP 9-4 COLLABORATIVE LEARNING ACTIVITY
(a)
2003
2002
2001
Net credit sales .............................................
$500,000
$600,000
$400,000
Credit and collection expenses
Collection agency fees ..............................
$ 02,450
Salary of accounts receivable clerk ...
3,800
Uncollectible accounts (1.6%) .................. 8,000
Billing and mailing costs (0.5%) ............... 2,500
Credit investigation fees (0.15%).............. 750
Total .....................................................
$ 17,500
$ 02,500
3,800
9,600
3,000
0
900
$ 19,800
$ 2,400
3,800
6,400
2,000
0 ,600
$ 15,200
Total expenses as a percentage of
net credit sales .......................................... 3.5%
3.3%
3.8%
(b)
Average accounts receivable (5%) ..............
$25,000
$30,000
$20,000
Investment income (8%) ...............................
$ 2,000
$ 2,400
$ 1,600
Total credit and collection expenses
per above ...................................................
$17,500
Add: Investment income* ............................
0002,000
Net credit and collection expense ...............
$19,500
$19,800
2,400
$22,200
$15,200
0 1,600
$16,800
Net expenses as a percentage of
net credit sales .......................................... 3.9%
3.7%
4.2%
* The lost investment income on the cash tied up in accounts receivable
is an additional expense of continuing the existing credit policies (an
opportunity cost).
9-50
BYP 9-4 (Continued)
(c) The analysis shows that the credit card fee of 3% of net credit sales
will be lower than the percentage cost of credit and collection
expenses in each year. This is true both before and after considering
the effect of income from other investment opportunities. It would be
cheaper for Campus Fashions to accept bank credit cards rather than
only their own credit card.
However, the decision hinges on (1) the accuracy of the estimate of
investment income, (2) the expected trend in credit sales, and (3) the
effect the new policy will have on sales. Non-financial factors include
the effects on customer relationships of the alternative credit policies,
and whether the Berkvoms want to continue with the problems of
handling their own accounts receivable.
Note that the case mentions that the company has lost some sales as
a result of its refusal to accept credit cards. If credit cards are
accepted, the extra sales will generate extra profits; operating
expenses might also be affected. These should be estimated and taken
into consideration as well.
9-51
BYP 9-5 COMMUNICATION ACTIVITY
Dear Lois,
The methods you asked about are methods of dealing with uncollectible
accounts receivables.
Allowance versus direct write-off methods:
The allowance method estimates uncollectible amounts and matches
the estimated bad debts expense against revenues generated in the
year of the sale. Estimated uncollectible accounts are recorded in a
contra account to accounts receivable, called Allowance for Doubtful
Accounts.
The direct write-off method does not estimate bad debts expenses in
advance and an allowance account is not used. Instead, when an
account is determined to be uncollectible, it is written off directly to
expense. Unless bad debt losses are insignificant, this method is not
acceptable for financial reporting purposes.
Allowance method—Percentage of sales and percentage of receivables
methods:
The percentage of sales and percentage of receivables methods are
both acceptable methods used to estimate the amount uncollectible
under the “allowance" method. Under the percentage of sales basis,
management establishes a percentage relationship between the
amount of credit sales and expected losses from uncollectible
accounts. This is based on past experience and anticipated credit
policy. The percentage is then applied to either total credit sales or
net credit sales of the current year. This basis of estimating emphasizes the matching of expenses with revenues, and is therefore
deemed an “income statement” approach.
9-52
BYP 9-5 (Continued)
Under the percentage of receivables basis, management establishes a
percentage relationship between the amount of receivables and
expected losses from uncollectible accounts. This percentage can be
applied to total accounts receivable or to aged classes of receivables
in which customer accounts are classified by the length of time they
have been unpaid. This basis emphasizes net realizable value of
receivables and is therefore deemed a "balance sheet" approach.
I hope that this answers your questions. Please do not hesitate to contact
me if you require any further information.
Sincerely,
9-53
BYP 9-6 ETHICS CASE
(a) The stakeholders in this situation are:
The president of Shirt Co.
The controller of Shirt Co.
The parent company, Clothes Corp.
Any other parties who rely upon the company’s financial
statements.
(b) Yes. The controller is posed with an ethical dilemma—should he/she
follow the president's “suggestion” and prepare misleading financial
statements (understated net income) or should he/she attempt to
stand up to and possibly anger the president by preparing a fair
(realistic) income statement.
(c) Shirt Co.'s growth rate should be a product of fair and accurate
financial statements. One should not prepare financial statements with
the objective of achieving or sustaining a predetermined growth rate.
The growth rate should be a product of management and operating
results, not of “creative accounting”.
9-54