Accounting 20
Module 4
Lesson 17
Accounting 20
1
Lesson 17
Accounting 20
2
Lesson 17
Lesson 17 - Reviewing and Expanding the
Accounting of Adjusting Entries
Topics:
•
•
•
•
•
•
•
•
•
Review of Prepaid Expenses and Depreciation
Adjusting for Bad Debts Expense
Adjusting for Accrued Revenues, Accrued Expenses, and Unearned Revenue
Remember These Important Points
Do You Understand?
Conclusion
Self Test
Answers for Self Test
Assignment 17
At the end of lesson 17, the student should be able to
•
analyze and prepare General Journal entries for prepaid expense adjustments.
•
prepare the necessary closing entries at the end of an accounting period.
•
explain the term depreciation.
•
calculate depreciation on fixed assets using the straight-line and the capital cost
allowance methods.
•
demonstrate the use of the Accumulated Depreciation account as a contra account,
and its placement in the balance sheet.
•
prepare the necessary General Journal period-end adjustment entries to record
depreciation expense.
•
prepare General Journal entries for the sale of assets at the end of their useful life.
Accounting 20
3
Lesson 17
•
prepare General Journal entries illustrating the direct write-off method.
•
calculate bad debts expense using either the aging of receivables method or the
percentage of net sales method.
•
illustrate the use of the Allowance for Bad Debts account and how it appears in the
balance sheet presentation.
•
demonstrate the similarities and differences in the Accumulated Depreciation and
Allowance for Bad Debts accounts.
•
prepare General Journal entries for adjustments involving accrued expenses,
accrued revenue, and unearned revenue transactions.
Accounting 20
4
Lesson 17
Review of Prepaid Expenses and Depreciation
Study pages 646 to 650 in the textbook.
Remember a prepaid expense is an asset that comes into existence when you pay in
advance for expenses that will benefit one or more future accounting periods.
Prepaid Insurance
When insurance is paid in advance, prepaid insurance is debited and cash is credited for
the full amount of the three-year policy--eg $360.
Dr. Prepaid Insurance
Cr. Cash
360
360
At the end of the first year, an adjustment is necessary to record the cost of the expired
portion of the Prepaid Insurance. This expired portion amounts to one-third of the $360
because one-third of the term has passed. The adjusting entry follows:
Dr. Insurance Expense
Cr. Prepaid Insurance
120
120
After the first year the Insurance Expense would be shown as an operating expense on the
income statement in the amount of $120 and the Prepaid Insurance would be shown on
the balance sheet as a Current Asset in the amount of $240 ($360 - $120).
Office Supplies
$400 worth of supplies are purchased for cash. The supplies will last for at least one year.
Dr. Office Supplies
Cr. Cash
Accounting 20
400
400
5
Lesson 17
The Office Supplies account is an asset because it represents a prepaid expense that will
benefit the entire year plus possibly part of the next year. At the end of the year, the
office supplies still left on hand must be counted to determine the portion that was used
during the accounting period. Assume this count revealed that $155 of office supplies was
still on hand. Since this business started with $400, it must have used $245 ($400 - $155).
The adjusting entry will be:
Dr. Office Supplies Expense
Cr. Office Supplies
245
245
The Office Supplies Expense account will appear on the income Statement under
Operating Expenses in the amount of $245. The Office Supplies account will appear on
the balance sheet as a Current Asset in the amount of $155 ($400 - $245) .
Depreciation
With the exception of land, fixed assets gradually wear out and become obsolete. Over the
years, the cost of these assets are gradually converted into an expense.
The process of writing off or allocating the cost of a plant asset over its estimated useful
life is called depreciation. Plant assets are long-term assets with an estimated productive
life of more than one year. Such assets have been purchased over their useful life to assist
in generating revenue for the business.
Since a benefit is received from these assets each year, a portion of the cost of the asset
should be charged to depreciation expense for the accounting period. Thus, expenses are
matched against the revenues that it helps to generate during that period.
When making the journal entry for the depreciation at the end of the accounting period,
the Depreciation Expense account is debited and an account called Accumulated
Depreciation is credited.
The Depreciation Expense account would be reported as one of the operating expenses in
the income statement. Accumulated Depreciation would be reported as contra to the cost
of Office Equipment reported in the balance sheet.
Accounting 20
6
Lesson 17
Straight-line depreciation is the most common method of spreading the cost of depreciable
assets over their useful lives. Under this method, the original cost of the asset, less any
amount estimated as disposal (salvage) value, is divided by the estimated number of
useful years. Equal amounts of depreciation are spread over the useful life of the fixed
asset.
Salvage or disposal value is an estimate of the asset's worth on the date on which it is
disposed. The estimated useful life is the length of time the asset will be owned.
Eg - the total cost of $12 000 with no salvage value must be spread over its useful life of
five years. (12 000  5 = 2400). A yearly adjustment of $2 400 would be made.
Three general ledger accounts used to record data for each type of fixed assets are
•
The fixed asset account used to record its original cost.
•
Accumulated Depreciation - a contra asset account used to record the total
depreciation of a fixed asset over a period of years.
•
An expense account used to record the annual depreciation.
Introducing the Subsidiary Fixed Asset Ledger
Businesses of a reasonable size have many pieces of fixed assets, such as Office
Equipment; for example - computers, filing cabinets, disks, and so on. To compute the
total depreciation expense for office equipment in larger businesses when individual pieces
of equipment are acquired in different accounting periods would be very time consuming
and inefficient. As well, it would be impractical to open separate general ledger accounts
for each item. However, it is necessary to account for all office equipment collectively and
individually.
To solve this problem, many businesses maintain a separate subsidiary ledger system
similar to the accounts receivable and accounts payable systems. An appropriately titled
controlling account would be kept in the General Ledger, while accounts for individual
pieces of office equipment would be filed in a subsidiary ledger called the Fixed Asset
Ledger.
Accounting 20
7
Lesson 17
A fixed asset record is an accounting form on which a business records data about each
fixed asset. At the close of each fiscal period, each fixed asset record is brought up to date.
The depreciation expense for that period is recorded and the book value of the asset is
figured. Study the two examples on pages 650 to 652 in the textbook.
Book value is the original asset cost less accumulated depreciation. In the example on
page 652, the book value is calculated as $700 less $120 for December 31, 20__ (the first
year). The book value then is $580. At the end of year 2, the book value is $460. (580
book value from year 1 - $120 accumulated depreciation for year 2). At the end of its
useful life (year 5) the book value is $100. (220 - 120). Assume that the typewriter is sold
for $100 at the end of year 5. $700 - 100 = $600 is the debit in accumulated depreciation.
Subtract the final balance in the accumulated depreciation account of $600 and you have a
balance of zero in accumulated depreciation and book value.
Book value plus the balance in the accumulated depreciation account = the original cost of
the asset. In our example on page 652 for year 4, the book value of $220 + $480 as the
balance in the accumulated depreciation account = $700 as the original cost.
Accounting for the Disposal of Fixed Assets
Study pages 653 to 657 in your textbook.
•
When an asset is sold for the disposal value, Cash and Accumulated Depreciation
are debited and the fixed asset is credited.
•
When an asset is sold for more than the disposal value, Cash and Accumulated
Depreciation are debited. The credit entries are the fixed asset and Gain on
Disposal of Fixed Asset to record the
sale in excess of book value.
•
When an asset is sold for less than the disposal value, Cash, Accumulated
Depreciation and Loss on Disposal of Fixed Asset are debited and the fixed asset is
credited.
Accounting 20
8
Lesson 17
Using the Capital Cost Allowance (CCA) Method
Study pages 658 to 661 in your textbook.
All businesses must use the Capital Cost Allowance Method for calculating depreciation
for income tax purposes.
Revenue Canada--Taxation divides fixed assets into classes where a maximum rate of
depreciation is given. Be able to make calculations such as the table on page 659.
The reconciliation of net income for income tax purposes as part of a condensed income
statement is shown on page 660.
Adjusting for Bad Debts Expense
Study pages 666 to 676 in the text book.
Most businesses buy and sell merchandise or service on account. The first time a
customer attempts to buy on account, the business involved will usually run a credit
check.
No matter how carefully credit ratings are checked, there are always customers who
cannot or will not pay their bills.
Bad debts are account receivable that cannot be collected. These accounts are a loss to the
accounts receivable of the business. They are part of the operating expense of selling on
account.
Bad debts expense is the operating expense caused by uncollectible accounts.
Analyzing the Direct Write-Off Method
Study the two journal entries on pages 666 and 667 in the textbook.
The Matching Principle states that revenue must be matched with expenses incurred in
producing or earning that revenue.
Accounting 20
9
Lesson 17
On page 667, note that bad debts expense was recorded in one year, but revenue from the
sale was recorded in another year. This is a violation of the matching principle. As the
example shows, year 1 will understate expenses and overstate net income. Year 2 will
overstate expenses and therefore understate net income.
Analyzing the Matching Entry
An adjusting entry is required at year-end to record the bad debts expense. Study the two
problems created as discussed on pages 668 to 670 in the textbook.
Analyzing the Write-Off
Study pages 670 to 672 in the textbook.
Estimating Bad Debts Expense: Two Methods
Two methods will be discussed--(1) aging the accounts receivable and (2) taking a
percentage of net sales.
Aging the Accounts Receivable Method
Study pages 672 to 675 in the textbook.
This method of estimating the bad debts expense determines the amount required in the
Allowance for Bad Debts. As well, this method is a process of analyzing accounts
receivable by classifying the amounts owed according to the length of time they are
overdue.
When the schedule is prepared, the amount outstanding in each charge customer's account
is shown. Usually a business will also show whether the account is not past due or
overdue. If it is overdue, the period of time it is overdue will be shown.
After the various columns are totalled, the estimate of the uncollectables is then made.
This percentage is estimated by management. The longer the account is overdue, the
higher will be the percentage used.
The estimated loss due to bad debts is now journalized in the General Journal by debiting
Bad Debts Expense and crediting Allowance for Bad Debts.
Accounting 20
10
Lesson 17
Study carefully three situations which will exist on page 674 of the text. The Allowance
account normally has a credit balance.
•
When the Allowance for Bad Debts has a credit balance, deduct the credit balance
from the dollar amount calculated.
Assume that the Allowance account ends the fiscal period with a credit balance of
$250. This means that you have overestimated write-offs during the period. You
estimate uncollectible amounts for the next fiscal period as $30 000.
To cover the $30 000, you must deduct the $250 already in the account. The new
adjustment is therefore $29 750. The adjusting entry would be:
Debit: Bad Debts Expense
29 750
Credit: Allowance for Bad Debts
•
29 750
If the Allowance account ends the period with a debit balance, you will have
underestimated write-offs (or written off more than allowed).
Assume that the Allowance account had ended the previous period with a debit
balance of $150. Again, assume that estimated uncollectable amounts for the next
fiscal period are $30 000. The adjustment required to bring the account to the
$30 000 credit balance required would be for $30 150--(30 000 + 150). The required
journal entry would be:
Debit: Bad Debts Expense
30 150
Credit: Allowance for Bad Debts
30 150
Percentage of Net Sales Method
Study pages 674 and 675 in the textbook.
The percentage to be used is based on past experience within your business. As an
example, if your business has lost 1% of all net sales to bad debts, that trend is likely to
continue.
The base is net sales; therefore, Sales Returns and Sales Discounts must be deducted first.
When the base or net sales is established, multiply that number by the percentage
calculated. If Net Sales is $80 000 - then you multiply that number by the base figure.
(80 000 x .01 = 800)
Accounting 20
11
Lesson 17
Accounting for GST and Bad Debts
Study page 675 in the textbook. Pay particular attention to the journal entries.
Comparing the Two Asset Accounts
Study page 676 in the textbook.
Adjusting for Accrued Revenues, Accrued Expenses and
Unearned Revenue
Study pages 680 to 686 in the text.
The cash basis of accounting revenue is recorded when cash is received; expenses are
recorded when cash is paid.
The accrual basis of accounting allows a business to account for revenue that has been
earned, but not yet received (sale on credit) and for expenses incurred but not yet paid
(purchases on account). This is the method you have been studying where there is an
attempt to match revenues and expenses.
Accrued Revenue
Accrued Revenue is a revenue which has been earned in this period. However, payment
will not be received or recorded until the next period.
Accrued revenue is a receivable that is classified as an asset.
Why an Adjusting Entry is Necessary
Most journal entries recording revenue are made when the revenue is received. However,
in the case of a note receivable, interest is earned for each day the note is held. This
interest is not received until the maturity date of the note.
To record revenue which has been earned but not yet received, an adjusting entry is made
at the end of the fiscal period.
Accounting 20
12
Lesson 17
The adjusting entry reports revenue in the fiscal period in which the revenue is actually
earned.
Each type of accrued revenue is adjusted at the end of a fiscal period. Consequently, the
income statement will show all of the revenue earned, but not received, in that period. As
well, the balance sheet will show all of the assets--including accrued revenue receivable.
Adjusting Entry for Accrued Interest Revenue
Assume that on November 1, ABC Company purchased $9 000 worth of Canada Savings
Bonds at 12% interest. ABC's receipt of interest payment will not be due until October 31.
By March 31, ABC has earned five months' interest--November 1 to March 31.
The calculation for the interest would be:
9 000 x .12 or (12/100) x 5/12 = $450 interest
Payment of this $450 will not be received until October 31 however. The necessary
adjusting journal entry on March 31 is:
Debit: Interest Receivable
Credit: Interest Revenue
450
450
Reporting Accrued Revenue on Financial Statements
Interest Receivable is a current asset which would be shown on the balance sheet.
Interest Revenue is a revenue account whose balance will be closed to Revenue & Expense
Summary at the end of the period. The interest earned in this period would show in the
"Other Revenue" section of the income statement.
Study the section on Unearned Revenue on pages 685 and 686 in the textbook.
Accrued Expenses
Accrued Expenses are expenses incurred in one fiscal period but not paid until the next
fiscal period.
Accounting 20
13
Lesson 17
An example of an accrued expense is wages expense. Wages are earned by employees in
one fiscal period but are not paid until the next period.
Why an Adjusting Entry is Necessary
Most entries recording expenses are also made when the expense is made. Some expenses,
however, are incurred before they are actually paid. As an example, wages expense is
incurred for each day that an employee works. However, the payment for that salary
expense is not made until the regular payday.
An adjusting entry is made at the end of a fiscal period to record the amount of an expense
that has been incurred but not yet paid. This adjustment reports the expense in the fiscal
period in which the expense is actually incurred.
Consequently, the income statement will show all expenses for the period even though
some have not been paid. The balance sheet will show all liabilities, including amounts
owed for accrued expenses--example, bank loan interest expense.
Adjusting Entry for Accrued Salaries Expense
Wages paid weekly--every Thursday for example--are a problem if the Thursday does not
come at month end.
Assume ABC Company pays its employees a total of $2 000 in wages every Thursday.
Their year end is Wednesday, March 31. Therefore, wages are owing for Friday, March
26; Monday, March 29; Tuesday, March 30; and Wednesday, March 31.
An adjustment must be made for these last four days worked out of the usual five. The
calculation would be
4/5 x 2 000 = $1 600.
The adjusting entry must be prepared as follows to show the expense and liability to the
business.
Debit: Wages Expense
Credit: Wages Payable
Accounting 20
1 600
14
1 600
Lesson 17
Reporting Accrued Wages on Financial Statements
The liability account, Wages Payable, is listed on the balance sheet in the Current
Liabilities section.
The expense account, Wages Expense, is listed on the income statement in the Operating
Expenses section. This account will be closed to Revenue & Expense Summary at the end
of the period.
Adjusting Entry for Interest Expense Accrued
Another type of accrued expense is that of interest owing on a bank loan.
Accrued Bank Interest Expense is interest incurred but not yet paid.
Assume that ABC borrowed $10 00.00 from the bank. Twelve percent interest is to be
paid by ABC semi-annually on June 30 and December 31. On March 31, ABC's year end,
three months' interest is owing for January, February, and March.
The interest calculation would be:
10 000 x .12 (or 12/100) x 3/12 = $300 interest.
The adjusting journal entry to show this expense and liability is as follows:
Debit: Bank Loan Interest Expense
Credit: Bank Loan Interest Payable
300
300
Reporting Accrued Interest on Financial Statements
The liability account Bank Loan Interest Payable is listed on the balance sheet in the
Current Liabilities section.
The expense account Bank Loan Interest Expense is listed on the income statement in the
Other Expenses section. This account will be closed to Revenue & Expense Summary at
the end of the period.
Accounting 20
15
Lesson 17
Remember These Important Points
•
A fixed asset ledger is a subsidiary ledger containing a separate account for each
fixed asset. A control account would be kept in the General Ledger.
•
Each subsidiary fixed asset record card contains all the information needed for
calculating and recording depreciation of the asset over its useful life.
•
The straight-line method of depreciation is used to calculate the yearly
depreciation.
•
The book value is the difference between the original cost of the asset less
accumulated depreciation.
•
At any time, book value plus the balance in the accumulated depreciation equals
the original cost of the asset.
•
Two important points must be considered before a fixed asset is removed from the
accounting records after that asset reaches the end of its useful life:
•
Depreciation expense must first be recorded from the last accounting period
right up to the date on which the fixed asset is disposed.
•
Any loss or gain must be calculated and accounted for in the entry to
eliminate the fixed asset from the accounting records.
•
All businesses must use the Capital Cost Allowance (CCA) method of depreciation
for income tax purposes.
•
Most businesses prepare their income statements according to the GAAP's. They
show a reconciliation of that net income, for income tax purposes, immediately
below the reported net income.
•
Bad Debts Expense must be adjusted because the bad debts situation is constantly
changing.
•
Allowance for Bad Debts is the total estimated bad debts for the next accounting
period. This account is a contra account, since it reduces the amount of the
accounts receivable by the estimated bad debts. The Allowance for Bad Debts has a
normal balance opposite to that of Accounts Receivable.
Accounting 20
16
Lesson 17
•
In the balance sheet, accounts receivable less the allowance for bad debts equals the
net amount of accounts receivable.
•
Two methods of estimating bad debts expense are aging the accounts receivable and
taking a percentage of net sales.
•
Aging of accounts receivable requires a classification of every receivable on the
business's books into one of the aging categories.
•
Percentage of net sales method is based on past experience within your own
business and related businesses.
•
Adjusting entries are needed at the end of the accounting period for revenues and
expenses that have been earned or incurred but which have not yet been recorded in
the accounts.
Do You Understand?
Prepaid expenses - short term pre-payment of expenses whose future benefits will be used
up in a later accounting period.
Depreciation - the process of spreading the laid-down cost of fixed assets over their
estimated useful lives.
Straight-line depreciation - a common method under GAAPs whereby equal amounts of a
depreciation expense are spread over the useful life of a fixed asset.
Fixed asset ledger - a subsidiary ledger containing a separate account for each fixed asset.
Book value - original asset cost less accumulated depreciation.
Gain on disposal of a fixed asset - a secondary source of revenue which normally is
reported under Other Revenue in the income statement.
Loss on disposal of a fixed asset - a non-operating expense usually reported under Other
Expenses in the income statement.
Capital cost allowance method - the depreciation method approved by Revenue Canada Taxation.
Accounting 20
17
Lesson 17
Bad debts expense - the cost of granting credit to an uncollectable account receivable.
Net accounts receivable - accounts receivable less allowance for bad debts.
Aging of accounts receivable - classifying the balance of each account according to the age
of the claim.
Cash basis of accounting - revenue is recorded when cash is received; expenses are
recorded when cash is paid.
Accrued expense - an expense that has occurred but has not been recorded or paid.
Accrued - grown or increased, as interest on a debt (receivable or payable) increases day
by day. The term applies mostly to a continuing flow of services rather than to physical
assets.
Accrued revenue - a revenue that has been earned but not recorded or received.
Unearned revenue - amounts received as revenue in one period, but not earned until
future periods.
Conclusion
Depreciation is a major expense for most businesses. Straight-line depreciation is a
common method whereby equal amounts of depreciation expense are spread over the
useful life of a fixed asset. The capital cost allowance method is the depreciation method
approved by Revenue Canada - Taxation.
The adjustments for bad debts expense and accruals brings the expenses and net income
or loss amounts for the fiscal period to more accurate figures.
Accounting 20
18
Lesson 17
Self Test
Accounting 20
1.
P 15-1, page 661 of the text
2.
P 15-3, page 662 of the text
3.
P 15-6, page 676 of the text
4.
P 15-7, page 677 of the text
5.
P 15-9, page 678 of the text
6.
P 15-11, page 686 of the text
7.
P 15-12, page 686 of the text
19
Lesson 17
P 15-1a, b
General Journal
D a te
20__
19__
Accounting 20
Ac c o u n t Ti tle a n d Ex p la n a ti o n
20
P ost
Re f.
Page
D e bi t
Cre d i t
Lesson 17
P 15-c
D a te
19__
20__
Accounting 20
Ac c o u n t Ti tle a n d Ex p la n a ti o n
21
P ost
Re f.
D e bi t
Cre d i t
Lesson 17
P 15-3a, b
General Journal
D a te
20__
19__
Ac c o u n t Ti tle a n d Ex p la n a ti o n
P ost
Re f.
Page
D e bi t
Cre d i t
P 15-3c
Yearly depreciation expense: _______________________________________________________
__________________________________________________________________________________
Monthly depreciation expense: _____________________________________________________
__________________________________________________________________________________
P 15-3d
Accounting 20
22
Lesson 17
P 15-6a, b, c
General Journal
D a te
20__
19__
Accounting 20
Ac c o u n t Ti tle a n d Ex p la n a ti o n
23
P ost
Re f.
Page
D e bi t
Cre d i t
Lesson 17
P 15-7a, b, c, d
General Journal
D a te
20__
19__
Accounting 20
Ac c o u n t Ti tle a n d Ex p la n a ti o n
24
P ost
Re f.
Page
D e bi t
Cre d i t
Lesson 17
P 15-9a
General Journal
D a te
20__
19__
Accounting 20
Ac c o u n t Ti tle a n d Ex p la n a ti o n
25
P ost
Re f.
Page
D e bi t
Cre d i t
Lesson 17
P15-9a (continued)
General Journal
D a te
19__
20__
Accounting 20
Ac c o u n t Ti tle a n d Ex p la n a ti o n
26
Page
P ost
Re f.
D e bi t
Cre d i t
Lesson 17
P 15-11
General Journal
D a te
20__
19__
Accounting 20
Ac c o u n t Ti tle a n d Ex p la n a ti o n
27
P ost
Re f.
Page
D e bi t
Cre d i t
Lesson 17
P 15-12a
D a te
20__
19__
Ac c o u n t Title a n d Ex p la n a tio n
P ost
Re f.
Ac c o u n t Ti t le a n d E x p la n a t i o n
P ost
R e f.
D e bit
Cre d it
P 15-12b
D ate
20__
19__
Accounting 20
28
D ebit
Cre d it
Lesson 17
Answers For Self Test
P 15-1a, b
Oct. 1
Prepaid Advertising
Cash
Paid for 3 months' advertising in advance
Oct. 31
Advertising Expense
Prepaid Advertising
To recognize expense for one month's advertising
450
150
450
150
P 15-1c
Oct. 1
Advertising Expense
Cash
Purchased 3 months' advertising
Oct. 31
Prepaid Advertising
Advertising Expense
To record prepaid advertising remaining at
month end
Accounting 20
29
450
300
450
300
Lesson 17
P 15-3a
Jan. 2
Land
Building
Cash
Mortgage Payable
Bought building and land for $20 000 down
and mortgage for balance.
20 000
80 000
Depreciation Expense/Building
Accumulated Depreciation/Building
To record one year's depreciation on the
building. (80 000 x 1/20)
4 000
20 000
80 000
P 15-3b
Dec. 31
P 15-3c
4 000
Yearly Depreciation Expense: $80 000 x 1/20 = $4 000.00
Monthly Depreciation Expense: 4 000 x 1/12 = $333.33
P 15-3d
Rex Wholesale Company
Partial Balance Sheet
as at December 31, 20__
Fixed Assets:
Building (at cost)
less: accumulated Depreciation/Building
$ 80 000
4 000
$ 76 000
P 15-6a
Bad Debts Expense
Allowance for Bad Debts
To set up allowance for Bad Debts.
950
950
P 15-6b
Bad Debts Expense
Allowance for Bad Debts
To set up allowance for Bad Debts.
Accounting 20
579
30
579
Lesson 17
P 15-6c
Bad Debts Expense
Allowance for Bad Debts
To set up allowance for Bad Debts.
1 509
1 509
P 15-7a
Allowance for Bad Debts
Accounts Receivable/T. Ogden
To write off uncollectible account.
438
438
P 15-7b
Accounts Receivable/D. Leenders
Allowance for Bad Debts
To re-establish customer account previously
written off.
527
Cash
527
Accounts Receivable/D. Leenders
Received on account.
527
527
P 15-7c
Bad Debts Expense
Allowance for Bad Debts
To establish Bad Debt allowance.
325
325
P 15-7d
Accounts Receivable/Highhopes
Allowance for Bad Debts
To re-establish customer account
previously written off.
350
Cash
100
Accounts Receivable/Highhopes
Received as partial payment of account.
Accounting 20
31
350
100
Lesson 17
P 15-9a
All entries the same as P 15-7 except part (c):
Net sales = 78 354 - 569 - 595 = $77 190
1% x 77 190 = $771.90
Dec 31
Bad Debts Expense
Allowance for Bad Debts
To set-up Allowance for Bad Debts
account.
771.90
771.90
Note: under the percent of sales method, no allowance is made for current
balance in Allowance for Bad Debts account.
P 15-11a
19-1
Mar. 1
Cash
Bank Loan Payable
Took bank loan at 12% per annum.
50 000
Sept. 1
Interest Expense
Bank Loan Interest Payable
To recognize interest expense on
bank loan for 6 months.
(50 000 x 12% x 6/12)
3 000
Dec. 31
Interest Expense
Bank Loan Interest Payable
To recognize interest expense for
4 months.
(50 000 x 12% x 4/12)
2 000
50 000
3 000
2 000
19-2
Mar. 1
Accounting 20
Interest Expense
Bank Loan Interest Payable
To recognize interest expense for
2 months.
(50 000 x 12% x 2/12)
32
1 000
1 000
Lesson 17
P 15-12a
Sept. 30
Accounts Receivable/Swank
Fees Earned
To record 6 months revenue from
service contract.
1 500
Oct 31
Cash
1 750
Apr. 1
Cash
1 750
Sept. 30
Unearned Revenue
Fees Earned
To recognize 6 months’ revenue
earned on Swank contract.
1 500
Oct. 31
Unearned Revenue
Fees Earned
To recognize 1 month’s revenue
on Swank contract.
250
Accounts Receivable/Swank
Fees Earned
To recognize one month’s revenue
on contract, and full payment.
1 500
1 500
250
P15-12b
Accounting 20
Unearned Revenue
Received payment for 7 months
in advance from Mr. Swank.
33
1 750
1 500
250
Lesson 17