Ex 9 8 aging of receivables schedule

Chapter Review

9-9cDiscussion Questions

1. What are the three classifications of receivables?

2. Dan's Hardware is a small hardware store in the rural township of Twin Bridges. It rarely extends credit to its customers in the form of an account receivable. The few customers who are allowed to carry accounts receivable are long-time residents of Twin Bridges with a history of doing business at Dan's Hardware. What method of accounting for uncollectible receivables should Dan's Hardware use? Why?

3. What kind of an account (asset, liability, etc.) is Allowance for Doubtful Accounts, and is its normal balance a debit or a credit?

4. After the accounts are adjusted and closed at the end of the fiscal year, Accounts Receivable has a balance of $673,400 and Allowance for Doubtful Accounts has a balance of $11,900. Describe how the accounts receivable and the allowance for doubtful accounts are reported on the balance sheet.

5. A firm has consistently adjusted its allowance account at the end of the fiscal year by adding a fixed percent of the period's sales on account. After seven years, the balance in Allowance for Doubtful Accounts has become very large in relation to the balance in Accounts Receivable. Give two possible explanations.

6. Which of the two methods of estimating uncollectibles provides for the most accurate estimate of the current net realizable value of the receivables?

7. Neptune Company issued a note receivable to Sailfish Company. (a) Who is the payee? (b) What is the title of the account used by Sailfish Company in recording the note?

8. If a note provides for payment of principal of $85,000 and interest at the rate of 6%, will the interest amount to $5,100? Explain.

9. The maker of a $240,000, 6%, 90-day note receivable failed to pay the note on the due date of November 30. What accounts should be debited and credited by the payee to record the dishonored note receivable?

10. The note receivable dishonored in Discussion Question 9 is paid on December 30 by the maker, plus interest for 30 days at 9%. What entry should be made to record the receipt of the payment?

9-9dPractice Exercises

PE 9-1A

Direct write-off method

1. Obj. 3

Example Exercise 9-1

Journalize the following transactions, using the direct write-off method of accounting for uncollectible receivables:

Apr. 15.

Received $800 from Jean Tooley and wrote off the remainder owed of $1,200 as uncollectible.

Aug. 7.

Reinstated the account of Jean Tooley and received $1,200 cash in full payment.

PE 9-1B

Direct write-off method

1. Obj. 3

Example Exercise 9-1

Journalize the following transactions, using the direct write-off method of accounting for uncollectible receivables:

Oct. 2.

Received $600 from Rachel Elpel and wrote off the remainder owed of $1,350 as uncollectible.

Dec. 20.

Reinstated the account of Rachel Elpel and received $1,350 cash in full payment.

PE 9-2A

Allowance method

1. Obj. 4

Example Exercise 9-2

Journalize the following transactions, using the allowance method of accounting for uncollectible receivables:

Apr. 15.

Received $800 from Jean Tooley and wrote off the remainder owed of $1,200 as uncollectible.

Aug. 7.

Reinstated the account of Jean Tooley and received $1,200 cash in full payment.

PE 9-2B

Allowance method

1. Obj. 4

Example Exercise 9-2

Journalize the following transactions, using the allowance method of accounting for uncollectible receivables:

Oct. 2.

Received $600 from Rachel Elpel and wrote off the remainder owed of $1,350 as uncollectible.

Dec. 20.

Reinstated the account of Rachel Elpel and received $1,350 cash in full payment.

PE 9-3A

Percent of sales method

1. Obj. 4

Example Exercise 9-3

At the end of the current year, Accounts Receivable has a balance of $3,750,000, Allowance for Doubtful Accounts has a credit balance of $22,750, and sales for the year total $48,400,000. Bad debt expense is estimated at ¾ of 1% of sales.

Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.

PE 9-3B

Percent of sales method

1. Obj. 4

Example Exercise 9-3

At the end of the current year, Accounts Receivable has a balance of $3,460,000, Allowance for Doubtful Accounts has a debit balance of $12,500, and sales for the year total $46,300,000. Bad debt expense is estimated at ½ of 1% of sales.

Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.

PE 9-4A

Analysis of receivables method

1. Obj. 4

Example Exercise 9-4

At the end of the current year, Accounts Receivable has a balance of $3,750,000, Allowance for Doubtful Accounts has a credit balance of $22,750, and sales for the year total $48,400,000. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated as $390,000.

Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.

PE 9-4B

Analysis of receivables method

1. Obj. 4

Example Exercise 9-4

At the end of the current year, Accounts Receivable has a balance of $3,460,000, Allowance for Doubtful Accounts has a debit balance of $12,500, and sales for the year total $46,300,000. Using the aging method, the balance of Allowance for Doubtful Accounts is estimated as $245,000.

Determine (a) the amount of the adjusting entry for uncollectible accounts; (b) the adjusted balances of Accounts Receivable, Allowance for Doubtful Accounts, and Bad Debt Expense; and (c) the net realizable value of accounts receivable.

PE 9-5A

Note receivable

1. Obj. 6

Example Exercise 9-5

Lundquist Company received a 60-day, 9% note for $28,000, dated July 23, from a customer on account.

1. Determine the due date of the note.

2. Determine the maturity value of the note.

3. Journalize the entry to record the receipt of the payment of the note at maturity.

PE 9-5B

Note receivable

1. Obj. 6

Example Exercise 9-5

Prefix Supply Company received a 120-day, 8% note for $450,000, dated April 9, from a customer on account.

1. Determine the due date of the note.

2. Determine the maturity value of the note.

3. Journalize the entry to record the receipt of the payment of the note at maturity.

PE 9-6A

Accounts receivable turnover and days' sales in receivables

1. Obj. 8

Example Exercise 9-6

Financial statement data for years ending December 31 for Chiro-Solutions Company follow:

1. Determine the accounts receivable turnover for 20Y2 and 20Y1.

2. Determine the days' sales in receivables for 20Y2 and 20Y1. Use 365 days and round to one decimal place.

3. Does the change in accounts receivable turnover and the days' sales in receivables from 20Y1 to 20Y2 indicate a favorable or unfavorable change?

PE 9-6B

Accounts receivable turnover and days' sales in receivables

1. Obj. 8

Example Exercise 9-6

Financial statement data for years ending December 31 for Robinhood Company follow:

1. Determine the accounts receivable turnover for 20Y9 and 20Y8.

2. Determine the days' sales in receivables for 20Y9 and 20Y8. Use 365 days and round to one decimal place.

3. Does the change in accounts receivable turnover and the days' sales in receivables from 20Y8 to 20Y9 indicate a favorable or unfavorable change?

9-9eExercises

EX 9-1

Classifications of receivables

1. Obj. 1

Boeing is one of the world's major aerospace firms with operations involving commercial aircraft, military aircraft, missiles, satellite systems, and information and battle management systems. As of a recent year, Boeing had $4,864 million of receivables involving U.S. government contracts and $2,250 million of receivables involving commercial aircraft customers such as Delta Air Lines and United Airlines.

 Should Boeing report these receivables separately in the financial statements or combine them into one overall accounts receivable amount? Explain.

EX 9-2

Nature of uncollectible accounts

1. Obj. 2

MGM Resorts International owns and operates hotels and casinos including the MGM Grand and the Bellagio in Las Vegas, Nevada. As of a recent year, MGM reported accounts receivable of $570,348,000 and allowance for doubtful accounts of $89,789,000. Johnson & Johnson manufactures and sells a wide range of health care products including Band-Aid® bandages and Tylenol®. As of a recent year, Johnson & Johnson reported accounts receivable of $11,002,000,000 and allowance for doubtful accounts of $268,000,000.

1. Compute the percentage of the allowance for doubtful accounts to the accounts receivable for MGM Resorts International. Round to one decimal place.

Answer

Check Figure: 15.7%

2. Compute the percentage of the allowance for doubtful accounts to the accounts receivable for Johnson & Johnson. Round to one decimal place.

3. Discuss possible reasons for the difference in the two ratios computed in (a) and (b).

EX 9-3

Entries for uncollectible accounts, using direct write-off method

1. Obj. 3

Journalize the following transactions in the accounts of Champion Medical Co., a medical equipment company that uses the direct write-off method of accounting for uncollectible receivables:

Jan. 19.

Sold merchandise on account to Dr. Dale Van Dyken, $30,000. The cost of the merchandise sold was $20,500.

July 7.

Received $12,000 from Dr. Dale Van Dyken and wrote off the remainder owed on the sale of January 19 as uncollectible.

Nov. 2.

Reinstated the account of Dr. Dale Van Dyken that had been written off on July 7 and received $18,000 cash in full payment.

EX 9-4

Entries for uncollectible receivables, using allowance method

1. Obj. 4

Journalize the following transactions in the accounts of Sedona Interiors Company, a restaurant supply company that uses the allowance method of accounting for uncollectible receivables:

May 1.

Sold merchandise on account to Beijing Palace Co., $18,900. The cost of the merchandise sold was $11,200.

Aug. 30.

Received $8,000 from Beijing Palace Co. and wrote off the remainder owed on the sale of May 1 as uncollectible.

Dec. 8.

Reinstated the account of Beijing Palace Co. that had been written off on August 30 and received $10,900 cash in full payment.

EX 9-5

Entries to write off accounts receivable

1. Obj. 3, 4

Quantum Solutions Company, a computer consulting firm, has decided to write off the $33,550 balance of an account owed by a customer, Alliance Inc. Journalize the entry to record the write-off, assuming that (a) the direct write-off method is used and (b) the allowance method is used.

EX 9-6

Providing for doubtful accounts

1. Obj. 4

At the end of the current year, the accounts receivable account has a debit balance of $6,800,000 and sales for the year total $81,500,000. Determine the amount of the adjusting entry to provide for doubtful accounts under each of the following assumptions:

1. The allowance account before adjustment has a debit balance of $68,250. Bad debt expense is estimated at ¾ of 1% of sales.

Answer

Check Figure: $611,250

2. The allowance account before adjustment has a debit balance of $68,250. An aging of the accounts in the customer ledger indicates estimated doubtful accounts of $575,000.

Answer

Check Figure: $643,250

3. The allowance account before adjustment has a credit balance of $45,000. Bad debt expense is estimated at ½ of 1% of sales.

4. The allowance account before adjustment has a credit balance of $45,000. An aging of the accounts in the customer ledger indicates estimated doubtful accounts of $450,000.

EX 9-7

Number of days past due

1. Obj. 4

Toot Auto Supply distributes new and used automobile parts to local dealers throughout the Midwest. Toot's credit terms are n/30. As of the end of business on October 31, the following accounts receivable were past due:

Determine the number of days each account is past due as of October 31.

Answer

Check Figure: Avalanche Auto, 84 days

EX 9-8

Aging of receivables schedule

1. Obj. 4

The accounts receivable clerk for Kirchhoff Industries prepared the following partially completed aging of receivables schedule as of the end of business on August 31:

The following accounts were unintentionally omitted from the aging schedule and not included in the preceding subtotals:

1. Determine the number of days past due for each of the preceding accounts as of August 31.

2. Complete the aging of receivables schedule by adding the omitted accounts to the bottom of the schedule and updating the totals.

EX 9-9

Estimating allowance for doubtful accounts

1. Obj. 4

Kirchhoff Industries has a past history of uncollectible accounts, as follows. Estimate the allowance for doubtful accounts, based on the aging of receivables schedule you completed in Exercise 9-8.

Answer

Check Figure: Allowance for doubtful accounts, $131,712

EX 9-10

Adjustment for uncollectible accounts

1. Obj. 4

Using data in Exercise 9-9, assume that the allowance for doubtful accounts for Kirchhoff Industries has a credit balance of $10,112 before adjustment on August 31. Journalize the adjusting entry for uncollectible accounts as of August 31.

EX 9-11

Estimating doubtful accounts

1. Obj. 4

Performance Bike Co. is a wholesaler of motorcycle supplies. An aging of the company's accounts receivable on December 31 and a historical analysis of the percentage of uncollectible accounts in each age category are as follows:

Estimate the proper balance of the allowance for doubtful accounts as of December 31.

EX 9-12

Entry for uncollectible accounts

1. Obj. 4

Using the data in Exercise 9-11, assume that the allowance for doubtful accounts for Performance Bike Co. had a debit balance of $28,400 as of December 31.

Journalize the adjusting entry for uncollectible accounts as of December 31.

EX 9-13

Entries for bad debt expense under the direct write-off and allowance methods

1. Obj. 5

The following selected transactions were taken from the records of Shipway Company for the first year of its operations ending December 31:

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1. Journalize the transactions under the direct write-off method.

2. Journalize the transactions under the allowance method. Shipway Company uses the percent of credit sales method of estimating uncollectible accounts expense. Based on past history and industry averages, ¾% of credit sales are expected to be uncollectible. Shipway Company recorded $3,778,000 of credit sales during the year.

3. How much higher (lower) would Shipway Company's net income have been under the direct write-off method than under the allowance method?

Answer

Check Figure: $8,225 higher

EX 9-14

Entries for bad debt expense under the direct write-off and allowance methods

1. Obj. 5

The following selected transactions were taken from the records of Rustic Tables Company for the year ending December 31:

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1. Journalize the transactions under the direct write-off method.

2. Journalize the transactions under the allowance method, assuming that the allowance account had a beginning credit balance of $36,000 on January 1 and the company uses the analysis of receivables method. Rustic Tables Company prepared the following aging schedule for its accounts receivable: