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Summary of



INTERMEDIATE ACCOUNTING



Dr Ruba Hamed 7-1



‫‪,,,‬تَـفَــ ّكــــــر‬ ‫‪,,‬تذكر ان الحياه قائمة على وجوديتك ليس اكثر‪ ,,‬فان لم تكن انت لما كانت الحياه‬ ‫‪..‬لذلك أَبق في ذهنك فكرة صافية حول أهمية وجودك انت كفرد مجرد بحد ذاتك‬ ‫‪ ..‬فبذلك يصح القلب ويزهو‪ ..‬فَ ُج ّل ما يحتاجه الفواد هو الحب‪ ..‬واذا ما أحببت نفسك لمست عنان الرضا‬ ‫‪..‬ان للحياة قوائم عليك بالتمسك بها وايجادها في مساحتك الشخصيه لكي تستقيم معك الطرق‬ ‫‪,,‬فال تنسى ان تمتلك ثالث‪ ..‬علم وموهبة وحرفة‪ ,‬فانك ان ملكتها اعلم انك ملكت طريق النجاح بالحياه‬ ‫‪..‬اما العلم فإكتسابه بيدك‪ ,‬واما الموهبه فهي هبه من هللا عليك االبحار بنفسك الكتشافها‬ ‫‪..‬اما عن الحرفه‪ ,‬فابحث عما تحب عمله بيديك وتعلمه واتقنه‬ ‫‪..‬أيقن شديد اليقين أن النجاح َمسلَ ُكه صعب ولكن نَشوة ثماره تعادل ألف مر ٍة تعبه‬ ‫‪..‬ولتمأل قلبك بالحب وااليمان والرضا‬ ‫‪..‬فإن أحببت أخلصت‪ ,‬وان آمنت ارتاح عقلك‪ ,‬وان رضيت انشرح صدرك‬ ‫ُبق أمام عينيك فكرة استحسان االختالف‪ ..‬وكلما قابلت اشخاصا مختلفين إبذل ما بجهدك لتتقبل اختالفهم وتأخذ صالحهم وتترك‬ ‫ولت ِ‬ ‫‪ ..‬طالحهم‪ ..‬وتلك مهارة تأتي بالتدريب‬



‫‪#R.AB‬‬



‫‪Ruba Hamed‬‬



‫‪7-2‬‬



CHAPTER 7 Cash and Receivables LEARNING OBJECTIVES 1. 2. 3. 4. 5.



Identify items considered cash. Indicate how to report cash and related items. Define receivables and identify the different types of receivables. Explain accounting issues related to recognition of accounts receivable. Explain accounting issues related to valuation of accounts receivable.



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CHAPTER REVIEW 1. Chapter 7 presents a detailed discussion of two of the primary liquid assets of a business enterprise, cash and receivables. Cash is the most liquid asset held by a business enterprise and possesses unique problems in its management and control. Receivables are composed of both accounts and notes receivables. Chapter coverage of accounts receivable places emphasis on trade receivables. Cash 2. (L.O. 1) Cash is a financial asset and a financial instrument. It consists of coin, currency, bank deposits, and negotiable instruments such as money orders, checks, and bank drafts. Cash that has been designated for some specific use, other than for payment of currently maturing obligations, is segregated from the general cash account. This amount may be classified as a current asset if it will be disbursed within one year or the operating cycle, whichever is longer. Otherwise, the amount should be shown as a non-current asset. 3. (L.O. 2) Cash equivalents are short-term, highly liquid investments that are both (a) readily convertible to known amounts of cash and (b) so near their maturity that they present insignificant risk of changes in interest rates. It now appears that the cash-equivalent classification will be eliminated. If an asset is not cash and is short-term in nature, it should be reported as a temporary investment. 4. Material amounts of cash set aside for a specific purpose, like payroll or dividend funds are segregated from Cash as restricted cash for reporting purposes. 5. It is common practice for an enterprise to have an agreement with a bank concerning credit and borrowing arrangements. When such an agreement exists, the bank usually requires the enterprise to maintain a minimum cash balance on deposit. This minimum balance is known as a compensating balance. Compensating balances that result in legally restricted deposits must be separately classified in the statement of financial position. The nature of the borrowing arrangement determines whether the compensating balance is classified as a current asset or a noncurrent asset. 6. Bank overdrafts occur when a company writes a check for more than the amount in the cash account. Bank overdrafts should be accounted for as accounts payable or, if material, separately disclosed. In certain circumstances, bank overdrafts are included as a component of cash. Accounts Receivable 7. (L.O. 3) Receivables are financial assets and financial instruments. They are defined as claims held against customers and others for money, goods, or services. Receivables may generally be classified as trade or nontrade. Trade receivables (accounts receivable and notes receivable) are the most significant receivables an enterprise possesses. Accounts receivable are oral promises of the purchaser to pay for goods and services sold. Notes receivable are written promises to pay a certain sum of money on a specified future date. Nontrade receivables arise from a variety of 7-4



transactions and can be written promises either to pay or to deliver. Nontrade receivables are generally classified and reported as separate items in the statement of financial position. 8. (L.O. 4) In most receivable transactions, the amount to be recognized is the exchange price (amount due from the debtor) between the two parties. Two factors that must be considered in measuring receivables are (a) the availability of discounts (trade and cash) and (b) the length of time between the sale and the payment due date (the interest element). 9. Two types of discounts that must be considered in determining the value of receivables are trade discounts and cash discounts. Trade discounts represent reductions from the list or catalog prices of merchandise. They are often used to avoid frequent changes in catalogs or to quote different prices for different quantities purchased. Cash discounts (also called sales discounts) are offered as an inducement for prompt payment and are communicated in terms that read, for example, 2/10, n/30 (2% discount if paid within 10 days of the purchase or invoice date, otherwise the gross amount is due in 30 days). a. The gross method records sales and accounts receivable at the gross amount of a sale. Sales discounts are recognized if the customer pays within the discount period. Sales Discounts are reported on the income statement as a deduction from Sales in the determination of net sales. b. The net method records sales and accounts receivable at an amount net of any cash discount. If the customer does not pay within the discount period, Sales Discounts Forfeited is credited for the lost discount. Sales Discounts Forfeited is reported on the income statement under the other expense and income section. 10. (L.O. 5) It is highly unlikely that a company that extends credit to its customers will be successful in collecting all of its receivables. Thus, some method must be adopted to account for receivables that ultimately prove to be uncollectible. The two methods currently used are the direct write-off method and the allowance method. Under the direct write-off method, the receivable account is reduced and an expense is recorded when a specific account is determined to be uncollectible. Dr/Bad debts expenses Cr/Accounts receivables The direct-write off method is theoretically deficient because it usually does not match costs and revenues of the period, nor does it result in receivables being stated at estimated realizable value on the statement of financial position. The direct write-off method is not appropriate if the amount deemed uncollectible is material. 11. Use of the allowance method requires a year-end estimate of expected uncollectible accounts based upon credit sales or outstanding receivables. The estimate is recorded by debiting an expense and crediting an allowance account in the period in which the sale is recorded. Then, in a subsequent period, when an account is deemed to be uncollectible, an entry is made debiting the allowance account and crediting accounts receivable.



7-5



12. Advocates of the allowance method contend that its use provides for a proper matching of revenues and expenses as well as reflecting a proper carrying value for accounts receivable at the end of the period. When the allowance method is used, the estimated amount of uncollectible accounts is normally based upon a percentage of sales or outstanding receivables. The percentage-of-sales method attempts to match costs with revenues, and is frequently referred to as the income statement approach. The percentage-of-receivables approach provides a reasonably accurate estimate of the cash realizable value of receivables shown on the statement of financial position. This approach is commonly referred to as the statement of financial position approach. 13. The method used to determine the amount of bad debt expense each year affects the amount of expense recorded. Under the percentage-of-sales method, the amount recorded as bad debt expense is the amount determined by multiplying the estimated percentage times the credit sales. However, under the percentage-of-receivables approach, the unadjusted ending balance in the allowance account must be considered in arriving at bad debts expense for the year. The percentage-of-receivables may be implemented in one of two ways: a.



Using a single composite rate that reflects an estimate of the uncollectible receivables, or



b. Using an aging schedule of accounts receivable, where a different percentage based on past experience is applied to each age category. An aging schedule also indicates which accounts are past due. 14. When an account proves to be uncollectible it is written off with the following entry: Debit /Allowance for Doubtful Accounts Credit /Accounts Receivable. # If an account written off is subsequently recovered, two entries are required: Debit /Accounts Receivable Credit /Allowance for Doubtful Accounts and then Debit /Cash Credit /Accounts Receivable.



7-6



7-7



EXERCISES: EX 7-1 King Enterprises owns the following assets at December 31, 2015. - Cash in bank—savings account €68,000 - Checking account balance €17,000 - Cash on hand 9,300 - Post-dated checks 750 - Tax refund due 31,400 - Certificates of deposit (180-day) 90,000 What amount should be reported as cash? EX 7-2 Bing Co. uses the gross method to record sales made on credit. On June 1, 2015, it made sales of £50,000 with terms 3/15, n/45. On June 12, 2015, Bing received full payment for the June 1 sale. Prepare the required journal entries for Bing Co. EX 7-3 Use the information from EX7-2, assuming Bing Co. uses the net method to account for cash discounts. Prepare the required journal entries for Bing Co. EX 7-4 Watt, Inc. had net sales in 2015 of €1,400,000. At December 31, 2015, before adjusting entries, the balances in selected accounts were Accounts Receivable €250,000 debit, and Allowance for Doubtful Accounts €2,400 credit. If Watt estimates that 2% of its net sales will prove to be uncollectible. Prepare the December 31, 2015, journal entry to record bad debt expense. EX 7-5 Use the information presented in EX 7-4 for Watt, Inc. (a) Instead of estimating the uncollectibles at 2% of net sales, assume that 10% of accounts receivable will prove to be uncollectible. Prepare the entry to record bad debt expense. (b) Instead of estimating uncollectibles at 2% of net sales, assume Watt prepares an aging schedule that estimates total uncollectible accounts at €24,600. Prepare the entry to record bad debt expense. EX 7-6 The controller for Landmark Co. is attempting to determine the amount of cash and cash equivalents to be reported on its December 31, 2015, statement of financial position. The following information is provided. 1. Commercial savings account of £600,000 and a commercial checking account balance of £800,000 are held at First National Bank of Olathe. 2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Landmark to write checks on this balance, £5,000,000. 3. Travel advances of £180,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction). 4. A separate cash fund in the amount of £1,500,000 is restricted for the retirement of long-term debt. 5. Petty cash fund of £1,000. 6. An I.O.U. from Marianne Koch, a company customer, in the amount of £150,000. 7. A bank overdraft of £110,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank. 7-0



8. The company has two certificates of deposit, each totalling £500,000. These CDs have a maturity of 120 days. 9. Landmark has received a check that is dated January 12, 2016, in the amount of £125,000. 10. Landmark has agreed to maintain a cash balance of £500,000 at all times at First National Bank of Olathe to ensure future credit availability. 11. Landmark has purchased £2,100,000 of commercial paper of Sergio Leone Co. which is due in 60 days. 12. Currency and coin on hand amounted to £7,700. Instructions (a) Compute the amount of cash (and cash equivalents) to be reported on Landmark Co.’s statement of financial position at December 31, 2015. (b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2015, statement of financial position. EX 7-7 Presented below are a number of independent situations. Instructions For each individual situation, determine the amount that should be reported as cash. If the item(s) is not reported as cash, explain the rationale. 1. Checking account balance $925,000; certificate of deposit $1,400,000; cash advance to subsidiary of $980,000; utility deposit paid to gas company $180. 2. Checking account balance $500,000; an overdraft in special checking account at same bank as normal checking account of $17,000; cash held in a bond sinking fund $200,000; petty cash fund $300; coins and currency on hand $1,350. 3. Checking account balance $590,000; post-dated check from customer $11,000; cash restricted due to maintaining compensating balance requirement of $100,000; certified check from customer $9,800; postage stamps on hand $620. 4. Checking account balance at bank $42,000; money market balance at mutual fund (has checking privileges) $48,000; NSF check received from customer $800. 5. Checking account balance $700,000; cash restricted for future plant expansion $500,000; short-term Treasury bills $180,000; cash advance received from customer $900 (not included in checking account balance); cash advance of $7,000 to company executive, payable on demand; refundable deposit of $26,000 paid to the government to guarantee performance on construction contract.



7-1



EX 7-8 On June 3, Bombay Company sold to Arquette Company merchandise having a sales price of £2,000 with terms of 2/10, n/60. An invoice totalling £90, terms n/30, was received by Arquette on June 8 from John Booth Transport Service for the freight cost. On June 12, the company received a check for the balance due from Arquette Company. Instructions (a) Prepare journal entries on the Bombay Company books to record all the events noted above under each of the following bases. (1) Sales and receivables are entered at gross selling price. (2) Sales and receivables are entered at net of cash discounts. (b) Prepare the journal entry under basis (a)(2), assuming that Arquette Company did not remit payment until July 29. EX 7-9 Presented below is information from Lopez Computers Incorporated. July 1 Sold R$30,000 of computers to Smallwood Company with terms 3/15, n/60. Lopez uses the gross method to record cash discounts. July 10 Lopez received payment from Smallwood for the full amount owed from the July transactions. July 17 Sold R$250,000 in computers and peripherals to The Hernandez Store with terms of 2/10, n/30. July 30 The Hernandez Store paid Lopez for its purchase of July 17. Instructions Prepare the necessary journal entries for Lopez Computers. EX 7-10 Sandal Company reports the following financial information before adjustments. Dr. Cr. Accounts Receivable €160,000 Allowance for Doubtful Accounts € 2,000 Sales Revenue (all on credit) 800,000 Sales Returns and Allowances 50,000 Instructions Prepare the journal entry to record bad debt expense assuming Sandal Company estimates bad debts at (a) 1% of net sales and (b) 5% of accounts receivable. EX 7-11 The trial balance before adjustment of Esabella Inc. shows the following balances. Dr. Cr. Accounts Receivable $80,000 Allowance for Doubtful Accounts 1,750 Sales Revenue (net, all on credit) $580,000 Instructions Give the entry for estimated bad debts assuming that the allowance is to provide for doubtful accounts on the basis of (a) 4% of gross accounts receivable and (b) 1% of net sales.



7-2



EX 7-12 ASSIGNMENT The following are a series of unrelated situations. 1. Hamlys Company’s unadjusted trial balance at December 31, 2015, included the following accounts. Debit Credit Allowance for doubtful accounts $4,000 Net sales $1,200,000 Hamlys Company estimates its bad debt expense to be 1½% of net sales. Determine its bad debt expense for 2015. 2. An analysis and aging of Stuart Corp. accounts receivable at December 31, 2015, disclosed the following. Amounts estimated to be uncollectible $ 180,000 Accounts receivable 1,750,000 Allowance for doubtful accounts (per books) 125,000 What is the cash realizable value of Stuart’s receivables at December 31, 2015? 3. Sharkco Co. provides for doubtful accounts based on 3% of credit sales. The following data are available for 2015. Credit sales during 2015 $2,400,000 Allowance for doubtful accounts 1/1/15 17,000 Collection of accounts written off in prior years (Customer credit was re-established) 8,000 Customer accounts written off as uncollectible during 2015 30,000 What is the balance in Allowance for Doubtful Accounts at December 31, 2015? 4. At the end of its first year of operations, December 31, 2015, Darden Inc. reported the following information. Accounts receivable, net of allowance for doubtful accounts $950,000 Customer accounts written off as uncollectible during 2015 24,000 Bad debt expense for 2015 84,000 What should be the balance in accounts receivable at December 31, 2015, before subtracting the allowance for doubtful accounts? 5. The following accounts were taken from Portsmouth Inc.’s trial balance at December 31, 2015. Debit Credit Net credit sales $750,000 Allowance for doubtful accounts $ 14,000 Accounts receivable 310,000 If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported for 2015. Instructions: Answer the questions relating to each of the five independent situations as requested. 7-3



EX 7-13 Self Practice Marseliya Corporation operates in an industry that has a high rate of bad debts. Before any year-end adjustments, the balance in Marseliya’s Accounts Receivable was $555,000 and Allowance for Doubtful Accounts had a credit balance of $40,000. The year-end balance reported in the statement of financial position for Allowance for Doubtful Accounts will be based on the aging schedule shown below. Days Account Outstanding Less than 16 days 16–30 days 31–45 days 46–60 days 61–75 days Over 75 days



Amount $300,000 100,000 80,000 40,000 20,000 15,000



Probability of Collection .98 .90 .85 .80 .55 .00



Instructions: (a) What is the appropriate balance for Allowance for Doubtful Accounts at year-end? (b) Show how accounts receivable would be presented on the statement of financial position. (c) What is the dollar effect of the year-end bad debt adjustment on the before-tax income? SOLUTIONS OF EXERCISES: EX 7-1 Cash in bank—savings account..................................................................................



€68,000



Cash on hand..............................................................................................................



9,300



Checking account balance..........................................................................................



17,000



Cash to be reported.....................................................................................................



€94,300



EX 7-2 June 1



Accounts Receivable.................................................



50,000



Sales Revenue.................................................. June 12



Cash...........................................................................



48,500*



Sales Discounts.........................................................



1,500



Accounts Receivable........................................ *£50,000 – (£50,000 X .03) = £48,500



7-4



50,000



50,000



EX 7-3 June 1



Accounts Receivable.................................................



48,500*



Sales Revenue.................................................. June 12



Cash...........................................................................



48,500 48,500



Accounts Receivable........................................



48,500



*£50,000 – (£50,000 X .03) = £48,500 EX 7-4 Bad Debt Expense..........................................................................................



28,000



Allowance for Doubtful Accounts (€1,400,000 X 2%)..........................................................................



28,000



EX 7-5 (a)



Bad Debt Expense.......................................................................................... 22,600 Allowance for Doubtful Accounts [(10% X €250,000) – €2,400].........................................................



(b)



22,600



Bad Debt Expense.......................................................................................... 22,200 Allowance for Doubtful Accounts (€24,600 – €2,400)..........................................................................



22,200



EX 7-6 (a)



Cash includes the following: 1.



Commercial savings account— First National Bank of Olathe................................................................



1. 2.



£ 600,000



Commercial checking account— First National Bank of Olathe................................................................



800,000



Money market fund—Volonte..................................................................



5,000,000



7-5



5.



Petty cash..................................................................................................



1,000



11.



Commercial paper (cash equivalent).........................................................



2,100,000



12.



Currency and coin on hand.......................................................................



7,700



Cash reported on December 31, 2015, statement of



£8,508,700



   financial position.....................................................................................



(b)



Other items classified as follows: 3.



Travel advances (reimbursed by employee)* should be reported as receivable—employee in the amount of £180,000.



4.



Cash restricted in the amount of £1,500,000 for the retirement of long-term debt should be reported as a noncurrent asset identified as “Cash restricted for retirement of long-term debt.”



6.



An IOU from Marianne Koch should be reported as a receivable in the amount of £150,000.



7.



The bank overdraft of £110,000 should be reported as a current liability.**



8.



Certificates of deposits of £500,000 each should be classified as temporary investments.



9.



Postdated check of £125,000 should be reported as an accounts receivable.



10.



The compensating balance requirement does not affect the balance in cash. A note disclosure indicating the arrangement and the amounts involved should be described in the notes.



*If not reimbursed, charge to prepaid expense. **If cash is present in another account in the same bank on which the overdraft occurred, offsetting is required. EX 7-7 1.



Cash balance of $925,000. Only the checking account balance should be reported as cash. The certificates



of



deposit



of



$1,400,000



should



be reported as a temporary investment, the cash advance to subsidiary of $980,000 should be reported as a receivable, and the utility deposit of $180 should be identified as a receivable from the gas company. 7-6



2.



Cash balance is $484,650 computed as follows: Checking account balance.......................................................... Overdraft....................................................................................



$500,000 (17,000)



Petty cash...................................................................................



300



Coin and currency......................................................................



1,350 $484,650



Cash held in a bond sinking fund is restricted. Assuming that the bonds are non-current, the restricted cash is also reported as non-current. 3.



Cash balance is $599,800 computed as follows: Checking account balance..........................................................



$590,000



Certified check from customer...................................................



9,800 $599,800



The postdated check of $11,000 should be reported as a receivable. Cash restricted due to compensating balance should be described in a note indicating the type of arrangement and amount. Postage stamps on hand are reported as part of supplies inventory or prepaid expenses. 4.



Cash balance is $90,000 computed as follows: Checking account balance..........................................................



$42,000



Money market mutual fund.........................................................



48,000 $90,000



The NSF check received from customer should be reported as a receivable. 5.



Cash balance is $700,900 computed as follows: Checking account balance..........................................................



$700,000



Cash advance received from customer.......................................



900 $700,900



Cash restricted for future plant expansion of $500,000 should be reported as a noncurrent asset. Shortterm Treasury bills of $180,000 should be reported as a temporary investment. Cash advance received from customer of $900 should also be reported as a liability; cash advance of $7,000 to 7-7



company executive should be reported as a receivable; refundable deposit of $26,000 paid to the government should be reported as a receivable. EX 7-8 (a)



1.



June 3



Accounts Receivable—Arquette.................................................................... 2,000 Sales Revenue.................................................................................... 2,000



June 12



Cash................................................................................................................ 1,960 Sales Discounts (£2,000 X 2%)..................................................................... 40 Accounts Receivable—Arquette........................................................ 2,000



2.



June 3



Accounts Receivable—Arquette.................................................................... 1,960 Sales Revenue (£2,000 X 98%)......................................................... 1,960



June 12



Cash................................................................................................................ 1,960 Accounts Receivable—Arquette........................................................ 1,960



(b)



July 29 Cash ...................................................................................................................... 2,000 Accounts Receivable—Arquette...........................................................



1,960



Sales Discounts Forfeited......................................................................



40



(Note: Sales discounts forfeited could have been recognized at the time the discount period lapsed. The company, however, would probably not record this forfeiture until final cash settlement.)



EX 7-9 July 1



Accounts Receivable...................................................................................... 30,000 Sales Revenue......................................................................................



7-8



30,000



July 10



Cash................................................................................................................ 29,100* Sales Discounts.............................................................................................. 900 Accounts Receivable............................................................................



30,000



*R$30,000 – (.03 X R$30,000) = R$29,100 July 17



Accounts Receivable...................................................................................... 250,000 Sales Revenue......................................................................................



July 30



250,000



Cash................................................................................................................ 250,000 Accounts Receivable............................................................................



250,000



EX 7-10 (a)



Bad Debt Expense.......................................................................................... 7,500 Allowance for Doubtful Accounts.....................................................



7,500*



*.01 X (€800,000 – €50,000) = €7,500 (b)



Bad Debt Expense.......................................................................................... 6,000 Allowance for Doubtful Accounts..................................................... *Step 1: Step 2:



6,000*



.05 X €160,000 = €8,000 (desired credit balance in Allowance account) €8,000 – €2,000 = €6,000 (required credit entry to bring allowance account to €8,000 credit balance)



EX 7-11 (a)



Bad Debt Expense.......................................................................................... 4,950 Allowance for Doubtful Accounts ($80,000 X 4%) + $1,750 = $4,950............................................... 7-9



4,950



(b)



Bad Debt Expense.......................................................................................... 5,800 Allowance for Doubtful Accounts $580,000 X 1% = $5,800...............................................................



5,800



EX 7-12 1.



2.



Net sales................................................................................................................



$1,200,000



Percentage.............................................................................................................



X



1 1/2%



Bad debt expense...................................................................................................



$



18,000



Accounts receivable..............................................................................................



$1,750,000



Amounts estimated to be uncollectible.................................................................



3.



4.



(180,000)



Cash realizable value.............................................................................................



$1,570,000



Allowance for doubtful accounts 1/1/15...............................................................



$



17,000



Establishment of accounts written off in prior years.............................................



8,000



Customer accounts written off in 2015.................................................................



(30,000)



Bad debt expense for 2015 ($2,400,000 X 3%)....................................................



72,000



Allowance for doubtful accounts 12/31/15...........................................................



$



67,000



Bad debt expense for 2015....................................................................................



$



84,000



Customer accounts written off as uncollectible during 2015....................................................................................................... Allowance for doubtful accounts balance 12/31/15..............................................



(24,000) $



60,000



Accounts receivable, net of allowance for doubtful accounts.........................................................................................



$ 950,000



Allowance for doubtful accounts balance 12/31/15..............................................



60,000



Accounts receivable, before deducting allowance for doubtful accounts.......................................................................



$1,010,00 0



7-10



5.



Accounts receivable..............................................................................................



$ 310,000



Percentage.............................................................................................................



X



3%



Bad debt expense, before adjustment....................................................................



9,300



Allowance for doubtful accounts (debit balance).................................................



14,000



Bad debt expense, as adjusted...............................................................................



7-11



$



23,300



EX 7-13 (a)



The Allowance for Doubtful Accounts should have a balance of $45,000 at year-end. The supporting calculations are shown below:



Days Account Outstanding 0–15 days 16–30 days 31–45 days 46–60 days 61–75 days



Amount $300,000 100,000 80,000 40,000 20,000



Expected Percentage Uncollectible



Estimated Uncollectible



.02 .10 .15 .20 .45



Balance for Allowance for Doubtful Accounts



$ 6,000 10,000 12,000 8,000 9,000 $45,000



The accounts which have been outstanding over 75 days ($15,000) and have zero probability of collection would be written off immediately by a debit to Allowance for Doubtful Accounts for $15,000 and a credit to Accounts Receivable for $15,000. It is not considered when deter-mining the proper amount for the Allowance for Doubtful Accounts. (b)



Accounts receivable ($555,000 – $15,000)........................................................ Less: Allowance for doubtful accounts............................................................. Accounts receivable (net)...................................................................................



$540,000 45,000 $495,000



(c)



The year-end bad debt adjustment would decrease before-tax income $20,000 as computed below: Estimated amount required in the Allowance for Doubtful Accounts.......................................................................................... Balance in the account after write-off of uncollectible accounts but before adjustment ($40,000 – $15,000)........................................... Required charge to expense......................................................................................



7-12



$45,000 25,000 $20,000