Before Class starts….(make sure your name is on all submissions)
Third Homework due 10/20(MW) or 10/21(TR)
before class.
Help Session 10/19 1:00-3:30pm in GBS130.
Fourth Homework due 10/27(MW) or
10/28(TR) before class.
Help session 10/26 1:00-3:30pm in GBS130
What questions do you have for me?
– TA Office Hours 6-7 T&R in GBS401 & Accounting
Lab Hours on http://bus.emory.edu/scrosso
– File cabinet downstairs contains your mail folder.
Your homework and exams returned there.
BUS210
Cash and
Accounts
Receivable
Percentage of Sales Method
• Usually based on credit sales, but may use
total sales or net sales as basis.
• Calculation:
Sales x % = Bad Debt Expense
(focus on the debit side of the AJE)
• Called the Income Statement approach,
because: revenues x % = expense.
• After making entry find the resulting ending
balance in the Allowance account.
P6-3 Bad debts over time
The company estimates bad debts at 3% of credit sales. The beginning balance in the
Allowance for doubtful accounts as of the beginning of 2013 was $10,000.
Credit sales
Actual bad debt write-offs
2015
2014
2013
$205,000
$200,000
$180,000
11,000
10,000
6,000
a. Provide the journal entries related to the Allowance account for all three years.
P6-3 Bad debts over time
The company estimates bad debts at 3% of credit sales. The beginning balance in the
Allowance for doubtful accounts as of the beginning of 2013 was $10,000.
Credit sales
Actual bad debt write-offs
2015
2014
2013
$205,000
$200,000
$180,000
11,000
10,000
6,000
b. Compute the balance in the allowance account at 12/31/15.
c. Comment on the sufficiency of the bad debts expense and the allowance over the 3
years.
P6-4 Uncollectibles over two periods
Company uses the percentage-of-net-sales method to account for bad debts.
Historically, 3% of net sales have proven to be uncollectible. During 2014 and 2015:
Gross sales
Sales discounts
Sales returns
2015
2014
$1,500,000
$1,800,000
100,000
130,000
50,000
20,000
a. Prepare the necessary adjusting entries on 12/31/14 to record the estimated bad
debt expense.
b. Assume the 1/1/2014 Allowance account balance was $65,000(credit) and that
$70,000 in bad debts were written off during year. What is the 12/31/14 balance
after adjustments.
P6-4 Uncollectibles over two periods
Company uses the percentage-of-net-sales method to account for bad debts.
Historically, 3% of net sales have proven to be uncollectible. During 2014 and 2015:
Gross sales
Sales discounts
Sales returns
2015
2014
$1,500,000
$1,800,000
100,000
130,000
50,000
20,000
c. Prepare the necessary adjusting entries on 12/31/15 to record the estimated bad
debt expense.
d. What is the 12/31/2015 Allowance balance? Assume that $85,000 in bad debts was
written off during the year.
Aging Method: Percentages of A/R
• Based on ending A/R and ending Allowance account.
• Calculation:
Ending A/R x % = Ending Allowance
(focus on the credit side of the AJE)
• Called Balance Sheet approach, because: ending
asset x % = ending contra asset.
• Requires the analysis of the Allowance account and
A/R before preparing the AJE.
• An aging schedule of A/R is the most accurate way to
estimate uncollectibles (see Figure 6-11).
E6-10 Aging schedule preparation
Compute the total receivables and expected bad debts as of the end of the
year based on the following:
Account age
Balance
Noncollection
Probability
$290,000
2%
1-45 days past due
110,000
5%
46-90 days past due
68,000
8%
Over 90 days past due
40,000
15%
Current
Aging of AR
Emory Company uses the accounts receivable aging method to estimate uncollectible accounts. At the
beginning of the year, the balance of the Accounts Receivable account was a debit of $90,430, and the balance
of Allowance for Uncollectible Accounts as a credit of $8,100. During the year, the company had sales on account
of $475,000, sales returns and allowances of $6,200, worthless accounts written off of $8,800, and collections
from customers of $452,730. At the end of year (December 31, 2015), a junior accountant for Emory Company
was preparing an aging analysis of accounts receivable.
At the top of page 5 of the report, the following totals appeared:
Customer
Account
Total
Balance Forward $89,640
Not Yet Due
1–30 Days Past
Due
31–60 Days Past
Due
61–90 Days Past
Due
Over 90 Days Past
Due
$49,030
$24,110
$9,210
$3,990
$3,300
To finish the analysis, the following accounts need to be classified:
From past experience, the company has found that the following rates are realistic for estimating uncollectible accounts:
Time
Percentage Considered Uncollectible
Not yet due
2
1–30 days past due
5
31–60 days past due
15
61–90 days past due
25
Over 90 days past due
50
Required
Complete the aging analysis of accounts receivable.
Compute the end-of-year balances (before adjustments) of Accounts Receivable and
Allowance for Uncollectible Accounts.
Prepare an analysis computing the estimated uncollectible accounts.
Calculate Emory Company's estimated uncollectible accounts expense for the year (round
the amount to the nearest whole dollar).
What role do estimates play in applying the aging analysis? What factors might affect these
estimates?
Year-end Entries: Bad Debts
•
During 2015, Omega Company had net sales of $11,400,000. Most of the sales were on credit. At the
end of 2015, the balance of Accounts Receivable was $1,400,000, and Allowance for Uncollectible
Accounts had a debit balance of $48,000.
• Omega Company's management uses two methods of estimating uncollectible accounts expense:
the percentage of net sales method and the accounts receivable aging method. The percentage of
uncollectible sales is 1.5 percent of net sales, and based on an aging of accounts receivable, the endof-year uncollectible accounts total $140,000.
1. Prepare the end-of-year adjusting entry to record the uncollectible accounts expense under each
method.
2. What will the balance of Allowance for Uncollectible Accounts be after each adjustment?
During 2015, Omega Company had net sales of $11,400,000. Most of the sales were on credit. At the end
of 2015, the balance of Accounts Receivable was $1,400,000, and Allowance for Uncollectible Accounts
had a debit balance of $48,000.
Omega Company's management uses two methods of estimating uncollectible accounts expense: the
percentage of net sales method and the accounts receivable aging method. The percentage of
uncollectible sales is 1.5 percent of net sales, and based on an aging of accounts receivable, the end-ofyear uncollectible accounts total $140,000.
1. Prepare the end-of-year adjusting entry to record the uncollectible accounts expense under each
method.
2. What will the balance of Allowance for Uncollectible Accounts be after each adjustment?
3.
4.
Why are the results different?
Which method is likely to be more reliable? Why?
Write-off of Accounts Receivable
Colby Company, which uses the allowance method, has Accounts Receivable
of $65,000 and an allowance for uncollectible accounts of $6,400 (credit). The
company sold merchandise to Irma Hegerman for $7,200 and later received
$2,400 from Hegerman. The rest of the amount due from Hegerman had to
be written off as uncollectible. Using T accounts, show the beginning balances
and the effects of the Hegerman transactions on Accounts Receivable and
Allowance for Uncollectible Accounts.
What is the amount of net accounts receivable before and after the write-off?
E6-8 Write-offs and Entries
The company estimates bad debts each year at 2% of credit sales. End of the year
amounts from the annual report are:
2015
2014
Credit sales
$75,300
$61,500
Accounts receivable
9,400
9,200
Allowance for bad debts
1,300
1,000
55
70
Bad debt recoveries
a. Compute the actual amount of write-offs during year.
b. Infer the journal entries that explain the accounts receivable and the related
allowance accounts activity during the year.
Liquidity Ratios
• Working Capital =CA-CL
• Current Ratio = CA/CL
• Quick Ratio or Acid Test Ratio =
(CA-Inv & Prepaids)/CL
How are these ratios affected by the journal entries you will
learn this chapter?
Sale on Account:
Cash Collection:
AR Writeoff:
AR Recovery:
Bad Debt AJE:
P6-7 Ignoring Potential Bad Debts
Income Statement
Sales
Cost of goods sold
Balance Sheet
$200,000 Cash
102,000 Accounts receivable
Gross profit
98,000 Other assets
Expenses
65,000 Total assets
Net income
$33,000 Current liabilities
$5,000
85,000
40,000
$130,000
13,000
Long-term NP
80,000
SHE
37,000
Total L + SHE
$130,000
The above financial information is for the Hadley Company’s first year of operation.
The income statement was not adjusted for bad debt expense. A large percentage
of sales were to 3 customers, one of which, Litzenberger Supply is in questionable
financial health, although still in business. Litzenberger owes Hadley $50,000 as
of the end of first year.
P6-7 continued
Required:
a. Adjust the financial statements of Hadley Company to reflect a more conservative
reporting with respect to bad debts, i.e. set up a provision. Recompute net
income. How does this adjustment affect your assessment of Hadley’s first year
of operations?
b.
Why would auditors probably require that Hadley choose the more conservative
reporting?
c.
Hadley’s CFO claims that no bad debt expense should be recorded because
Litzenberger is still conducting operations as of the end of year. How would you
respond to this claim?