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16 Feb 2019

What are the pros and cons of extendingcredit?

Define net realizable value.

Bad debt expense should be recorded in same periodas the sale to avoid violating the expense recognition (matching)principle. Under the allowance method an estimate of the bad debtsare recorded and later adjusted. Describe the following twosteps of the allowance method and provide the required journalentries.

Adjust for estimated bad debts

Remove (write off) specific customerbalances

Small companies are allowed to use the direct write-offmethod instead of the allowance method. Explain this method and thecons to using it.

What kind of account is allowance for doubtful accounts?Is it permanent or temporary? Which financial statement can it befound on?

Bad debt expense can be estimated using two differentmethods. Describe each of the below methods and provide an examplejournal entry.

Percentage of sales method

Aging of accounts receivable method

Explain how account recoveries are treated. What is thejournal entry?

What is the difference between a note receivable and anaccount receivable?

What is the formula to calculate interest on a notereceivable? Explain each of the three variables.

Provide the following journal entries:

Establish note receivable

Accrue interest earned

Record interest received

Record principal received

What is the receivables turnover ratio formula and whatdoes it tell you?

What is the days to collect formula and what does ittell you?

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Keith Leannon
Keith LeannonLv2
17 Feb 2019

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Related questions

The following selected transactions were taken from the recordsof Shipway Company for the first year of its operations endingDecember 31:

Apr. 13 Wrote off account of Dean Sheppard, $5,190.
May 15 Received $2,600 as partial payment on the $6,900 account of DanPyle. Wrote off the remaining balance as uncollectible.
July 27 Received $5,190 from Dean Sheppard, whose account had beenwritten off on April 13. Reinstated the account and recorded thecash receipt.
Dec. 31 Wrote off the following accounts as uncollectible (record asone journal entry):
Paul Chapman $3,480
Duane DeRosa 2,600
Teresa Galloway 1,560
Ernie Klatt 2,180
Marty Richey 780
Dec. 31 If necessary, record the year-end adjusting entry for theuncollectible accounts.

For those amount boxes in which no entry is required, leave thebox blank. If an entry is not required, select "No entry" from thedropdown box(es).

a. Journalize the transactions under the directwrite-off method.

Apr. 13 Bad Debt Expense
Accounts Receivable-DeanSheppard
May 15 Cash
Bad Debt Expense
Accounts Receivable-DanPyle
July 27-reinstate Accounts Receivable-DeanSheppard
Bad Debt Expense
July 27-collection Cash
Accounts Receivable-DeanSheppard
Dec. 31-write-off Bad Debt Expense
Accounts Receivable-PaulChapman
Accounts Receivable-DuaneDeRosa
Accounts Receivable-TeresaGalloway
Accounts Receivable-ErnieKlatt
Accounts Receivable-MartyRichey
Dec. 31-adjusting No entry
No entry

b. Shipway Company uses the percent of creditsales method of estimating uncollectible accounts expense. Based onpast history and industry averages, 2% of credit sales are expectedto be uncollectible. Shipway Company recorded $1,266,500 of creditsales during the year.

Journalize the transactions under the allowance method.

Apr. 13 Allowance for DoubtfulAccounts
Accounts Receivable-DeanSheppard
May 15 Cash
Allowance for DoubtfulAccounts
Accounts Receivable-DanPyle
July 27-reinstate Accounts Receivable-DeanSheppard
Allowance for DoubtfulAccounts
July 27-collection Cash
Accounts Receivable-DeanSheppard
Dec. 31-write-off Allowance for DoubtfulAccounts
Accounts Receivable-PaulChapman
Accounts Receivable-DuaneDeRosa
Accounts Receivable-TeresaGalloway
Accounts Receivable-ErnieKlatt
Accounts Receivable-MartyRichey
Dec. 31-adjusting Bad Debt Expense
Allowance for DoubtfulAccounts

Feedback

Remember that under the direct write-off method, Bad DebtExpense is not recorded until the customer's account is determinedto be worthless.

Under the allowance method once a customer account is identifiedas uncollectible, it is written off against the allowanceaccount.

Learning Objective 5.

c. How much higher (lower) would ShipwayCompany's net income have been under the direct write-off methodthan under the allowance method?


At December 31, 2009, Vizarro Company reports the following resultsfor its calendar-year.
Problem 9-3A
Estimating and reporting bad
debts
P1 P2
Cash sales . . . . . . . . . $2,184,700
Credit sales . . . . . . . . 3,720,000
Accounts receivable . . . . . . . . . . . . . . . . . $1,127,500debit
Allowance for doubtful accounts . . . . . . . . 29,030 debit
Check Bad Debts Expense:
(1a) $55,800, (1c) $62,855
In addition, its unadjusted trial balance includes the followingitems.
Required
1. Prepare the adjusting entry for Vizarro Co. to recognize baddebts under each of the following inde-
pendent assumptions.
a. Bad debts are estimated to be 1.5% of credit sales.
b. Bad debts are estimated to be 1% of total sales.
c. An aging analysis estimates that 3% of year-end accountsreceivable are uncollectible.
2. Show how Accounts Receivable and the Allowance for DoubtfulAccounts appear on its December31,
2009, balance sheet given the facts in part 1a.
3. Show how Accounts Receivable and the Allowance for DoubtfulAccounts appear on its December31,
2009, balance sheet given the facts in part 1c.

P1 - Apply the direct write-off and allowance methods to ac-
count for accounts receivable. The direct write-off method
charges Bad Debts Expense when accounts are written off asun-
collectible. This method is acceptable only when the amount ofbad
debts expense is immaterial. Under the allowance method, bad
debts expense is recorded with an adjustment at the end ofeach
accounting period that debits the Bad Debts Expense accountand
credits the Allowance for Doubtful Accounts. Theuncollectible
accounts are later written off with a debit to the Allowancefor
Doubtful Accounts.
P2 - Estimate uncollectibles using methods based on sales and
accounts receivable. Uncollectibles are estimated by focus-
ing on either (1) the income statement relation between baddebts
expense and credit sales or (2) the balance sheet relationbetween
accounts receivable and the allowance for doubtful accounts.The
first approach emphasizes the matching principle using theincome
statement. The second approach emphasizes realizable value of
accounts receivable using the balance sheet.

I

Raintree Cosmetic Company sells its products to customers on a credit basis. An adjusting entry for bad debt expense is recorded only at December 31, the company’s fiscal year-end. The 2017 balance sheet disclosed the following: Current assets: Receivables, net of allowance for uncollectible accounts of $48,000 $ 522,000 During 2018, credit sales were $1,840,000, cash collections from customers $1,920,000, and $57,000 in accounts receivable were written off. In addition, $4,800 was collected from a customer whose account was written off in 2017. An aging of accounts receivable at December 31, 2018, reveals the following: Percentage of Year-End Percent Age Group Receivables in Group Uncollectible 0–60 days 70 % 5 % 61–90 days 20 15 91–120 days 5 20 Over 120 days 5 40 Required: 1. Prepare summary journal entries to account for the 2018 write-offs and the collection of the receivable previously written off. 2. Prepare the year-end adjusting entry for bad debts according to each of the following situations: Bad debt expense is estimated to be 4% of credit sales for the year. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is estimated to be 10% of the year-end balance in accounts receivable. Bad debt expense is estimated by computing net realizable value of the receivables. The allowance for uncollectible accounts is determined by an aging of accounts receivable. 3. For situations (a)–(c) in requirement 2 above, what would be the net amount of accounts receivable reported in the 2018 balance sheet?

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