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Chapter 9

Accounting for Receivables
QUESTIONS
1.

When customers use credit cards, the selling company can avoid having to directly evaluate
the credit standing of its customers. They also avoid the risk of bad debts and often are paid
cash from the credit card company more quickly than if customers were granted credit
directly. Moreover, they hope to increase sales, and net income, from the added convenience
to buyers.

2.

Revenues and expenses usually are not matched under the direct write-off method because
the revenues recorded from the uncollectible accounts often appear on the income statement
of one period while the bad debts expenses of those revenues appear on the income
statement of a later period when the account(s) is known to be uncollectible.

3.

The accounting principle of materiality suggests that the requirements of accounting
standards can be ignored if their effect on the financial statements is unimportant to their
users’ business decisions.

4.

Writing off a bad debt against the Allowance account does not reduce the estimated realizable
value of a company’s accounts receivable because the write-off reduces the balances of both
Accounts Receivable and the Allowance for Doubtful Accounts by equal amounts. This
means the difference between them (called estimated realizable value) remains the same.

5.

The adjusted balances of Bad Debts Expense and Allowance for Doubtful Accounts are
virtually never equal because the expense number reflects only the events of the current
period, and the allowance is the accumulated result of events over a number of prior periods.
The only way that they could be equal would be if write-offs during the prior period exactly
equaled the beginning balance of the Allowance account.

6.

Creditors prefer notes receivable to accounts receivable because the notes can be more
easily converted into cash before they are due by discounting (or selling) them to a financial
institution. Also, a note represents a clear written acknowledgment by the debtor of both the
debt and its amount and terms.

7.

($ thousands)

Allowance / (Net Receivables + Allowance)
February 2, 2003:

$1,453/ ($34,373 + $1,453) = 4.06%

February 3, 2002:

$1,182 / ($26,894 + $1,182) = 4.21%

The allowance for fiscal year-end February 2, 2003, is a smaller percent of accounts receivable
than it is in the previous year (4.06% compared to 4.21%).

Solutions Manual, Chapter 9

©McGraw-Hill Companies, Inc., 2005
19

8.

Tastykake uses the allowance method to account for doubtful accounts as evidenced by the
receivables being reduced by an allowance on the balance sheet. The realizable value of
accounts receivable as of December 28, 2002, is its net amount of $20,881,597. Another name
for the Allowance for Doubtful Accounts is the Allowance for Uncollectible Accounts.

9.

Harley-Davidson, Inc., shows accounts receivable and the current portion of finance
receivables in the current asset section of the balance sheet. If motorcycle buyers obtain
financing for their purchases from Harley then the amounts owed in the next 12 months (and
sometimes longer) from these buyers will show in the finance receivables account. The
finance receivables comprise a greater percentage of the current assets than do the accounts
receivables.

QUICK STUDIES
Quick Study 9-1 (15 minutes)
1.

Cash
9,500
Credit Card Expense....................................................
500
Sales.........................................................................

10,000

To record credit card sales less fees.

Cost of Goods Sold...................................................... 7,500
Merchandise Inventory...........................................

7,500

To record cost of sales.

2.

Accounts Receivable—Credit Card Cos..................... 2,880
Credit Card Expense....................................................
120
Sales.........................................................................

3,000

To record credit card sales less fees.

Cost of Goods Sold...................................................... 1,500
Merchandise Inventory...........................................

1,500

To record cost of sales.

7 days later
Cash
2,880
Accounts Receivable—Credit Card Cos...............

2,880

To record cash receipts.

©McGraw-Hill Companies, Inc., 2005
20

Fundamental Accounting Principles, 17th Edition

Quick Study 9-2 (15 minutes)
1.
Oct. 31 Allowance for Doubtful Accounts........................... 1,000
Accounts Receivable—C. Schaub.....................

1,000

To write off account.

2.
Dec. 9 Accounts Receivable—C. Schaub*..........................
Allowance for Doubtful Accounts.....................

200
200

To reinstate a written off account.
*If there is a strong belief that the remaining $800 will be
paid soon, then the full $800 balance can be reinstated.

9 Cash...........................................................................
Accounts Receivable—C. Schaub.....................

200
200

To record payment on a receivable.

Quick Study 9-3 (15 minutes)
1.
Dec. 31 Bad Debts Expense................................................
Allowance for Doubtful Accounts...................

835
835

To record estimate of uncollectibles
[($89,000 x 1.5%) - $500 credit].

2.

($89,000 x 1.5%) + $200 debit = $1,535

3.
Dec. 31 Bad Debts Expense................................................ 2,700
Allowance for Doubtful Accounts...................

2,700

To record estimate of uncollectibles
($270,000 x 1%).

Quick Study 9-4 (15 minutes)
Aug. 2

Notes Receivable—T. Menke............................
Accounts Receivable—T. Menke......................

5,500
5,500

To record receipt of note on account.

Oct. 31

Maturity date
Cash....................................................................
Notes Receivable—T. Menke......................

Solutions Manual, Chapter 9

5,665
5,500

©McGraw-Hill Companies, Inc., 2005
21

............Interest Revenue.. Inc.....500 x 12% x 90/360)......... ©McGraw-Hill Companies.. 2005 22 Fundamental Accounting Principles.. 165 To record cash received on note plus interest ($5................ 17th Edition .

...........700) / 2 = 5................. Jan.. Interest Revenue.................. The 5...........3 times per year..............3 turnover is 30% lower than the average turnover of 7.............................. Interest Receivable....900 + $133....................5 for its competitors... Quick Study 9-6 (10 minutes) Accounts receivable turnover = Net sales Average accounts receivable $754... Chapter 9 ©McGraw-Hill Companies........ 8........................3 times Interpretation: An accounts receivable turnover of 5. The company needs to identify the cause of this poor performance and rectify the situation to at least compete at the average level...Quick Study 9-5 (15 minutes) Dec................ 15 Maturity date Cash........... Notes Receivable..... Inc.............................000 x 6% x 30/360).000 To record cash received on note plus interest............3 implies that the company’s average accounts receivable balance is converted into cash 5... 31 Interest Receivable...... Solutions Manual.........200 ($152... 2005 23 ..... Interest Revenue.........060 40 20 8......................... 40 40 To record the year-end adjustment for interest earned ($8.

... 9..417 Nov....... 5 10 13 30 4............... 12 Accounts Receivable—Continental Bank.............................. 8.. 6..250 13 733 30 2........ 21 189 Fundamental Accounting Principles........... 3. 5.....817 ©McGraw-Hill Companies......800 To record cost of sales.. *($9..250 733 2.....500 To record cost of sales. 5 4.. Exercise 9-2 (25 minutes) Part 1 GENERAL LEDGER Accounts Receivable Nov.....5% fee....800 Merchandise Inventory..400 To record credit card sales less 2..... *($5............................. 17th Edition .............. 6...025) Cost of Goods Sold............... 5......265 To record cash received on credit sales less fees.....................................417 1................ Inc................................ 8 Cash 8.606 Bal............832 Credit Card Expense*........ 3......200 x .EXERCISES Exercise 9-1 (20 minutes) Apr........... 5................265 Credit Card Expense*....... 21 189 10 1............... 135 Sales.........400 x ................. 5......................606 Sales Returns and Allowances Nov.............................. 20 Cash.............................. 2005 24 Sales Nov....265 Accounts Receivable—Continental Bank.................200 To record credit card sales less 4% fee......................04) Cost of Goods Sold...............500 Merchandise Inventory. 368 Sales........................

..... Matt Albin.......250 Nov................ 420 420 To reinstate an account......000)...817 Comparison: The total of the Schedule of Accounts Receivable ($8.................................. Yum Enterprises...023 Yum Enterprises Nov.... 4........... 21 189 544 Part 2 Sami Company Schedule of Accounts Receivable November 30............ 420 420 To write off an account............ June 5 Accounts Receivable—P................... Accounts Receivable—P........... Accounts Receivable—P.................023 1............250 544 $8............. 10 1.................. Solutions Manual................................................ $7................... Feb............................................ 31 Bad Debts Expense.................... Allowance for Doubtful Accounts.005 x $875. 7........................375 To record estimated bad debts expense (........... 2005 25 ............................ Total.....................606 Bal....... Coble..... Coble.........................375 Allowance for Doubtful Accounts.......................417 30 2.............. 13 Bal......... 1 Allowance for Doubtful Accounts.. 4... Matt Albin 733 Nov. 2005 Surf Shop..............817)................. Coble................................................ Exercise 9-3 (20 minutes) Dec........... June 5 Cash........817) is proved with the balance of the Accounts Receivable controlling T-account from Part 1 ($8......Exercise 9-2 (concluded) Part 1—continued ACCOUNTS RECEIVABLE LEDGER Surf Shop Nov........... Inc.............. Chapter 9 420 420 ©McGraw-Hill Companies. 5 4....

©McGraw-Hill Companies. 2005 26 Fundamental Accounting Principles. Inc.To record cash received on account.. 17th Edition .

.............452 To record estimated bad debts expense.......................... 4........................................10............. 27 Cash..................... 3....... 1.............000 x .......452 Allowance for Doubtful Accounts...............................000 x .................. 4.............332 = 2........... Chapter 9 ©McGraw-Hill Companies.17..................... * Unadjusted balance Estimated balance ($53.3.........................................04) Required adjustment = $ 915 = 2.205 Allowance for Doubtful Accounts.. 6.280 Factoring Fee Expense*.....000 To record sale of receivable.... 10....... 31 Bad Debts Expense*.....000 To record cost of sales.........120 = $3...... ** Unadjusted balance Estimated balance ($53............................ Note to Financial Statements: Solutions Manual...................................... 18..000 Merchandise Inventory.......................205 credit credit credit b.........295 To record sales on credit....04) 17 Cash.......000 Notes Payable..................................205 To record estimated bad debts expense....... 9 Cash..................000 To record cash from a loan.295 Sales.............. Dec..............000 x .................436 To record cash received on account...... 6....Exercise 9-4 (15 minutes) a.............436 Accounts Receivable... 2005 27 .................................................................. 3...... Inc.................................. 720 Accounts Receivable................ Cost of Goods Sold....04) Required adjustment = $ 1... 31 Bad Debts Expense**...................1.120 = $1........... *($18.............................. Dec........................452 debit credit credit Exercise 9-5 (20 minutes) July 4 Accounts Receivable..... 3....

000 are pledged as security for a $10..000 note payable to Center Bank. 17th Edition . Inc. 2005 28 Fundamental Accounting Principles. ©McGraw-Hill Companies.Accounts receivable in the amount of $13.

................000 100 50 To record cash received on note plus interest earned [$5.. 3........... Notes Receivable—M..................255 Accounts Receivable—S...... Interest Revenue..... Exercise 9-7 (20 minutes) Mar....... 21 Notes Receivable—S.......000 5. 155 3........................ Allen.........06 x 60/360]......... 50 50 To record interest earned [$5.............. Allen.......................................... Hernandez....... Hernandez.......... Allen. 3.. 5...100 To record note dishonored plus interest earned [$3..... Chapter 9 ©McGraw-Hill Companies........................ Solutions Manual....... Dec...... Notes Receivable—S............ 31 Allowance for Doubtful Accounts.. Dec.... Sept.................. Interest Revenue.... 2005 29 .... 31 Interest Receivable...... 3.................................... Hernandez....... 17 Accounts Receivable—S................Exercise 9-6 (15 minutes) Nov...10 x 180/360 = $155]. Accounts Receivable—M.... Interest Receivable.. Inc........ Hernandez.150 5............... 1 Notes Receivable—M..............06 x 120/360]........100 x ........255 Interest Revenue... 5......................100 Accounts Receivable—S.. Apr............... 30 Cash.......000 x .........000 x . Hernandez.... 3......... 3..100 To record receipt of note on account................000 To record receipt of note on account.255 To write off an account.......

........ Notes Receivable—J...............000 x .........000 To record cash received on note plus interest. 4.. 93* 40 10...................000 To record receivable for dishonored note plus interest [$2...10.......000 To record receipt of note on account..................................08 x 18/360].. 2....000 x ..... 15 2................................000 Accounts Receivable-Shandi Co.........000 Accounts Receivable—L........000 Accounts Receivable—J....... Notes Receivable—L.............. 3 Notes Receivable—Shandi Co. 16 Accounts Receivable—J.........09 x 30/360].........................000 To record receipt of note on account................. Inc..... 17th Edition ................. Clark............................ Clark............ 11 Cash.. [$10................................ ©McGraw-Hill Companies.........................000 x ............ 40 40 To record interest earned [$10.................015 To write off account...... 4................... 2.....................000 x ......... 2005 30 Fundamental Accounting Principles.... 10.. 2................. 100 4....... Torres....... 2................................... Clark... Torres................ Torres......... 31 Interest Receivable........ 4............133 Interest Revenue .10 x 90/360].........000 To record receipt of note on account....................100 Interest Revenue........ Interest Revenue.....Exercise 9-8 (25 minutes) 2004 Dec........000 To record cash received on note with interest [$4...........08 x (60-18)/360= $93 rounded] Mar......... 2.... Torres................................. June 1 Cash..........................015 Accounts Receivable—J................ Interest Receivable. May 1 Allowance for Doubtful Accounts.........10........015 Interest Revenue.. 13 Notes Receivable—L.. Apr. 17 Notes Receivable—J.................. Torres.. Notes Receivable—Shandi Co.... 2005 Feb.........

000 ($20.400)/2 = 12. This may indicate that the company has tightened its credit policy or has improved its collection efforts.700)/2 = 14..4 times Year 2005 accounts receivable turnover: $305.0 – 12. Chapter 9 ©McGraw-Hill Companies.000 ($22. relative to competitors (turnover of 11). Inc.700 + $17. 2005 31 . Solutions Manual. Waseem is performing better than average.6 (14.4) times more in 2005 than in 2004.Exercise 9-9 (15 minutes) Year 2004 accounts receivable turnover: $236.0 times Analysis: Waseem Company turned over its accounts receivable 1.900 + $20. Also.

....................... *($3................................................... Sales.......840 Fundamental Accounting Principles.......................136 64 3.............900 x .. 10 No journal entry required. Cost of Goods Sold............................................................... 8 Accounts Receivable—Access............. Credit card expense*........... 5.....................800 Merchandise Inventory...............800 To record credit card sales less fee........................... 4.02) Cost of Goods Sold............... 2005 32 7................ 6 Accounts Receivable—Access......800 x .......200 To record credit card sales less fee.............. *($5......................... 500 To record cost of sales.2.....800 To record cost of sales....................................... Sales. Cianci...........200 x ............................................... Credit card expense*......840 7............................ Sales..900 Merchandise Inventory........... Accounts Receivable—N......................900 To record credit card sales less fee............................................ 17 Cash........ 3............................. 13 Allowance for Doubtful Accounts.......................................... 329 329 To write off account due............. 17th Edition ........................ 2.............900 To record cost of sales.1..........................02) Cost of Goods Sold...........................723 177 5....... Credit card expense*..... ©McGraw-Hill Companies..............................................................................200 To record cost of sales.................. Wells......................................PROBLEM SET A Problem 9-1A (30 minutes) June 4 Accounts Receivable—A.......................................................................................................................200 Merchandise Inventory.. 3.... *($4.704 96 4....... 5 Cash.................03) Cost of Goods Sold.................................................................... Accounts Receivable—Access.................3.. Inc............................... 500 Merchandise Inventory..... 1................. Sales......... 750 750 To record sales on credit..

. Sales Discounts*......... 18 Cash............................. Cianci.......................... Accounts Receivable—A. Inc....................... Chapter 9 ©McGraw-Hill Companies...........02) Solutions Manual........................ *($750 x ............................... 735 15 750 To record cash received less discount... 2005 33 ...........To record cash received from credit card co.......

......750 To record sales on account.............. 2005 34 Fundamental Accounting Principles....... Ending receivables..300) 994.............. 789.......... Percent uncollectible............ Dr............ Cash...............914** 20..........750 (789........200 To record cash received on account.................. c........................ Allowance for Doubtful Accounts... Collections..... Cr.......... 1...250 x 1.................Problem 9-2A (35 minutes) 2004 a.......803....... Accounts Receivable.475............ 35.......214 Cr.... d..000 Merchandise Inventory................ ** rounded to nearest dollar ©McGraw-Hill Companies............... Write-offs....300 20........................214 To record estimated bad debts....000 To record cost of sales.................803.......... Inc........................ Credit sales.5% 14... b.................................... Unadjusted balance....................................803....................200 789..... Accounts Receivable.............................................. Cost of Goods Sold............... 1. $ 0 1. Bad Debts Expense................300 To write off accounts..................475......................200) (20............... Adjustment to the allowance.. Required ending allowance........................................................750 Sales....... Accounts Receivable..............214 35...... Allowance for Doubtful Accounts ...............* * Beginning receivables........ 1....300 $ 35.............. 17th Edition .... 20. 1.......

.. $ 994.................... $14..181 * Beginning receivables...............825..................... Write-offs...181 36..........825.......181 Dr..................................... 1.........................................................825... Ending receivables.....450..........................................................800 28..................................... 28.. Collections.......295** Cr.... f....................800 Adjustment to the allowance..............914 Write-offs (Dr..... Allowance for Doubtful Accounts..... Cash... Credit sales............ Required ending allowance......... 1.......800) 1..........................).800 Accounts Receivable.......800 To record write-off of accounts........ Cr.................................486......5% 22.............800 To record cash received on account...........................................450. Cost of Goods Sold...... Accounts Receivable........... ** rounded to nearest dollar Solutions Manual......700 To record sales on account....................... h............800) (28....... Bad Debts Expense....... Allowance for Doubtful Accounts.)............... $ 13...886 36...... 1................. * 36..... To record estimated bad debts............................ 2005 35 ... g... 1............700 (1..........................000 Merchandise Inventory..................... 1...304...................Problem 9-2A (Concluded) 2005 e.. Chapter 9 ©McGraw-Hill Companies............700 Sales............304...........000 To record cost of sales.. 28...250 1..... Accounts Receivable.....350 x 1........ 1..... Percent uncollectible..304................................. Inc........................ Unadjusted balance Beginning (Cr.....

..534....070........100 Less allowance for doubtful accounts..505** uncollectible accounts)........ $1... c. 2005 36 Fundamental Accounting Principles............................. 53.......255 * Unadjusted balance.............534.......Problem 9-3A (35 minutes) Part 1 a.505)** Or: Accounts receivable (net of $53..............595 ** See computations in Part 1c........................ 70................69.. (53............................015...............930* uncollectible accounts)....016.. 31 Bad Debts Expense..............100 Less allowance for doubtful accts....680 Credit Unadjusted allowance balance... * 69.... $1....930 credit Part 3 Current assets: Accounts receivable. 31 Bad Debts Expense........100 x 5%). $1.53...........750 Debit Adjusted balance.....595 $1.. (54...... $1.............................. Inc........... $54........... 53....................... Allowance is 5% of accounts receivable: Dec.........................70..................... 17th Edition .........................016............ To record estimated bad debts.. $15.......680 Allowance for Doubtful Accounts..505 credit Required adjustment..378 To record estimated bad debts [($1....378 Allowance for Doubtful Accounts.000) x ........ $70......... 15...............070........170 $1........................... ©McGraw-Hill Companies....000 x .070. $69.............015..............680 To record estimated bad debts [$3...... 31 Bad Debts Expense........... b.......930)* Or: Accounts receivable (net of $54........01]............255 credit Part 2 Current assets: Accounts receivable..750 + $3..... Expense is 2% of credit sales: Dec........................... Expense is 1% of total sales: Dec......02]..170 * Adjustment to the allowance...........750 debit Estimated balance ($1........255 Allowance for Doubtful Accounts...............803.............

.... $31... The entry to write off an account involves a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable...625 To record estimated bad debts..6800 = $ 9.......720 8..* * Unadjusted balance...... 2005 37 .. 31.....Problem 9-4A (35 minutes) Part 1 Calculation of the estimated balance of the allowance for uncollectibles Not due: 1 to 30: 31 to 60: 61 to 90: Over 90: $730.080 4...125 7..160 $45......025 Credit Part 2 Dec........000 x .0125 = 354. both of which are balance sheet accounts.......940 15..000 x ..... Net income is affected only by the annual recognition of the estimated bad debts expense. 31. 31 Bad Debts Expense.....400 credit 45..........0650 = 48... Net income for Year 2005 (the year of the original sale) included an estimated expense for write-offs such as this one......625 Allowance for Doubtful Accounts...................000 x .625 credit Part 3 Writing off the account receivable in 2006 will not directly affect year 2006 net income.....025 credit Required adjustment..... Solutions Manual.....0200 = 76... Inc...........3275 = 12..000 x ..000 x .. Chapter 9 ©McGraw-Hill Companies.................. which is journalized as an adjusting entry.. $13... Estimated balance...

.202... 2005 Feb. Notes Receivable—J.....600 9.......... 9.................... Accounts Receivable—Mare Co............... Inc. Accounts Receivable—T.....600 To record note received on account.... Halaam....08 x 90/360)] = $4........... 2.............................414 14 2...120 4..600 To record cash received on note with interest.Problem 9-5A (75 minutes) Part 1 2004 Dec................... 4............... 16 Accounts Receivable—J.................................... 31 Interest Receivable.......... Interest Revenue.... Duke...... June 2 Accounts Receivable—Mare Co...400 x .....202* 82 4..... Notes Receivable—T....07 x 30/360]. 14 Cash...... 17th Edition .. 16 Notes Receivable—T...................... Notes Receivable—Mare Co...............120 + ($4.........................................................744 108 36 9............120 + $82...120 To record note received on account.. Interest Revenue.............. 36 36 To record interest earned [$9............40 * Rounded to nearest dollar ©McGraw-Hill Companies............ Duke................... 17 Notes Receivable—J................ Halaam. Apr. Interest Revenue..120 To record receivable for dishonored note [$4.... Interest Receivable.............40 = $4........... 9............600 x ................. 2005 38 Fundamental Accounting Principles.......................................400 2.. 2........................... 2 Notes Receivable—Mare Co... Halaam........ 4..120 x ... Accounts Receivable—J.....400 To record receivable for dishonored note plus interest [$2... Mar...................... Duke.......................09 x 15/360]..... Halaam.......... Interest Revenue.400 To record note received on account...................

............ Accounts Receivable—Birch and Byer.....440 To record note received on account... Notes Receivable—Birch and Byer......414 2..... Sept.................................... Accounts Receivable—Mare Co..... the business must disclose this information in notes to its financial statements.............. 2005 39 ....080 To record cash received on note plus interest ($2.202 To record cash received on account plus additional interest [$4............ Aug................................................ 1 Allowance for Doubtful Accounts.......... which means that if the business dishonors its obligations under the loan................ Dec...............................................Problem 9-5A (Concluded) July 17 Cash..080 2... Inc...........080 To record note received on account......................................080 x ................................. This is a requirement because the business has committed a portion of its assets to cover a specific portion of its liabilities.. Interest Revenue.......202 x . 2... Chapter 9 ©McGraw-Hill Companies...440 5.............. 5........ 3 Notes Receivable—York..10 x 90/360 = $136).......115 35 2.......................... 5 Cash... Notes Receivable—York......... Interest Revenue........414 To record write-off of account....................... 2..... 7 Notes Receivable—Birch and Byer.. 2....................08 x 46/360 = $43 (rounded)].... 4...... 5...........245 43 4......... Accounts Receivable—J.10 x 60/360 = $35 rounded)...................... Halaam.... the creditor can claim the amount Solutions Manual. 2 Cash........576 136 5.......... Accounts Receivable—York............ Interest Revenue...440 To record cash received on note plus interest ($5. Part 2 Analysis Component: When a business pledges its receivables as security for a loan and the loan is still outstanding at period-end...............440 x ...... Nov..........

Inc. 2005 40 Fundamental Accounting Principles.of receivables identified in the pledge as collateral to cover the loan.. 17th Edition . ©McGraw-Hill Companies. This arrangement must be disclosed to satisfy the full-disclosure principle.

...PROBLEM SET B Problem 9-1B (30 minutes) Aug........... Credit Card Expense*(rounded to nearest dollar)....248 *($3........1........................................02) 15 Accounts Receivable—Aztec........................................ 10 Cash.........248 x ................................... Cost of Goods Sold.. 1.............. Inc..............456 Merchandise Inventory............................. Solutions Manual.......151 97 3........724 56 2...........758 To record cost of sales...................150 Merchandise Inventory....................780 *($2...................................780 To record sales on credit.................. Cost of Goods Sold................................................................................575 *($1..... Cost of Goods Sold.....960 *($2.... 1. Sales..... Credit card expense*(rounded to nearest dollar).............. To record credit card sales less fee............ Credit Card Expense* (rounded to nearest dollar)........ Sales.................2........ 03) 3............... 2............. 02) 2...............................758 Merchandise Inventory........... 2............. Chapter 9 ©McGraw-Hill Companies................. 14 Cash.......................................... 4 Accounts Receivable—Stacy Dalton...... Accounts Receivable—Stacy Dalton.............................. To record credit card sales less fee.. 11 Accounts Receivable—Aztec................ To record credit card sales less fee........ Sales.............................................575 x ....................................780 2..........................901 59 2.. 2...........................750 To record cost of sales................ Cost of Goods Sold...960 x .......... 02) 1. 2005 41 .456 To record cost of sales........................................................... To record cash received less discount............150 To record cost of sales.. 1................780 x ..1............................ Sales Discounts* (rounded to nearest dollar).... Sales.........1.......................750 Merchandise Inventory....................................................543 32 1.

.........................609 To record estimated bad debts.........................609 Cr.. Adjustment to the allowance....609 10....................0% 2................. Accounts Receivable........... d........................................................................ ** Rounded to nearest dollar ©McGraw-Hill Companies.. Collections....... 4.. 500......................... Accounts Receivable—Ness City......................................... Write-offs...... Cash...18 No journal entry required......................................330 $ 10.......................000 To record cost of sales........ 398 398 To write off account due.....................330 To record write-off of accounts............ Accounts Receivable........ Bad Debts Expense.....250 437....................................................910 x 1..490 To record sales on account...... 437.......... Cr.490 673......... Inc................... Dr... Required ending allowance. Ending receivables... 10. Accounts Receivable................... $ 0 673. 22 Allowance for Doubtful Accounts..330) 227..... Accounts Receivable—Aztec.330 8... 8................. 673................ Percent uncollectible......... Problem 9-2B (35 minutes) 2004 a. 17th Edition ... Allowance for Doubtful Accounts................279** 8..444 To record cash received from credit card co...... c.............................................490 (437. 2005 42 Fundamental Accounting Principles.......* *Beginning receivables........ Allowance for Doubtful Accounts............................................. Sales..... Cost of Goods Sold......444 4................. Unadjusted balance....................................... Credit sales..... 25 Cash...........000 Merchandise Inventory..250 To record cash received on account...................................250) (8........ 500.................... b...................................

. 10....... 2005 43 .........Problem 9-2B (Concluded) 2005 e.......090 Adjustment to the allowance........... Ending receivables........ h............................... Cost of Goods Sold..................388 $ 227.............. Percent uncollectible.......... 930........ g. 650..................700 x 1......................220 Accounts Receivable................ Write-offs.................. Required ending allowance.................................................... Accounts Receivable....... 650.................................... Cash..388 * *Beginning receivables.... 930.........100 Sales......................................577 Cr................... 10.......... Collections.... Allowance for Doubtful Accounts.................. Bad Debts Expense........... Solutions Manual.........................090 10........220) (10............... f............. To record estimated bad debts......279 Write-offs (debit).... Inc.....................090) 257...000 To record cost of sales............811 Dr...........................090 To record write-off of accounts........ 890.........220 To record cash received on account................. ©McGraw-Hill Companies............... Credit sales......... 7.......................100 To record sales on account.388 Cr........ Allowance for Doubtful Accounts......0% 2... Chapter 9 10......100 (890.................... $ 2....... $ 10......................................000 Merchandise Inventory... Unadjusted balance Beginning (credit)..................................................... Accounts Receivable............ 10..... 890..910 930.............

...... 31 Bad Debts Expense...................... (28........ Unadjusted allowance balance....225* uncollectible accounts). Expense is 1....015].... 31 Bad Debts Expense..........5% of credit sales: Dec..............................200 $36................ Expense is 2.... $31............. c......... (36.....200 credit Required adjustment.... Inc.......500 Fundamental Accounting Principles........ $ 28.025]...................... 2005 44 $446............. 33..................300 credit Part 2 Current assets: Accounts receivable. Allowance for Doubtful Accts.....000 + $1............225)* Or: Accounts receivable (net of $36........241...025 To record estimated bad debts [$1....Problem 9-3B (35 minutes) Part 1 a......500)** ©McGraw-Hill Companies.....241...000 x 6%).. b....015.775 credit credit credit Part 3 Current assets: Accounts receivable............. Allowance is 6% of accounts receivable: Dec..............000 Less allowance for doubtful accounts.....300 To record estimated bad debts........................000 x .775 $438...... * Adjustment to the allowance.. 31 Bad Debts Expense. 31..... 17th Edition ...840 To record estimated bad debts [($1...............000) x . 23..... 5.......... Adjusted balance.... 23......5% of total sales: Dec.......... $475........000 Less allowance for doubtful accounts.......... 31.... $475........225 $438...300 Allowance for Doubtful Accounts... $ 23...................500 credit Unadjusted balance..............025 Allowance for Doubtful Accounts..* * Estimated balance ($475................025 5..................840 33...

.Or: Accounts receivable (net of $28......500 ** See computations in Part 1c.... Chapter 9 ©McGraw-Hill Companies. $446... Solutions Manual. 2005 45 .. Inc.500** uncollectible accounts).

.034 $23.... both of which are balance sheet accounts... 17th Edition .....968 credit Required adjustment......700 x .. ©McGraw-Hill Companies....600 x ....400 x ........390 = 2.....................968 Part 2 Dec.* * Unadjusted balance..... Net income is affected only by the annual recognition of the estimated bad debts expense......112 31 to 60: 58. 28.040 = 7...... Net income for Year 2005 (the year of the original sale) included an estimated expense for write-offs such as this one.100 debit Estimated balance...Problem 9-4B (35 minutes) Part 1 Calculation of the estimated balance of the allowance Not due: $296....085 = 4............800 x ...... Inc... 23..068 credit Part 3 Writing off the account receivable in 2006 will not directly affect Year 2006 net income..068 Allowance for Doubtful Accounts... which is journalized as an adjusting entry.....020 = $ 5......... $ 4.... $28..930 61 to 90: 7.... 2005 46 Fundamental Accounting Principles.......000 x ..928 1 to 30: 177.......... 31 Bad Debts Expense.. 28..... The entry to write off an account involves a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable..964 Over 90: 3.068 To record estimated bad debts..820 = 3...

.................600 Accounts Receivable—Kramer Co................................ Interest Receivable........ 6.............800 To record cash received on note with interest... 1 Notes Receivable—S..............800 x ..... 12.............. 12.. 4............. Stephens........ 30 Accounts Receivable—Kramer Co............ 12................08 x 60/360 = $83 rounded)..200 To record cash received on note plus interest ($6.....600 x ...... Apr.....08 x 60/360]..... 2005 Jan...200 Accounts Receivable—S................ 28 Notes Receivable—Kramer Co..........283 Interest Revenue..600 To record receivable for dishonored note plus interest [$12..200 To record note received on account.. Myers...................... 31 Interest Receivable... Interest Revenue...... 1 Notes Receivable—J.......... Stephens........................200 x ..........800 To record note received on account........ 4........ Myers..896 Interest Revenue......... Stephens...................... 30 Cash................................................... Dec............600 To record note received on account.....................06 x 30/360]....................... 32 64 4... 30 Cash..........Problem 9-5B (75 minutes) Part 1 2004 Nov...663 Interest Revenue................. 6............................ Feb........ 64 64 To record interest earned [$4...........800 Accounts Receivable—J........ Mar............ Chapter 9 ©McGraw-Hill Companies.. Notes Receivable—S. Solutions Manual....... 83 6..... Notes Receivable—Kramer Co............................ 63 12.................. 4... Inc........................... Meyers....................... 2005 47 ...... Notes Receivable—J.............................. 6.................................

............ Accounts Receivable—J. Nov... 12............... Aug......033 33 2.................... 17th Edition ..... Sept....... Notes Receivable—J. Rye.. Accounts Receivable—R... Part 2 Analysis Component: When a business pledges its receivables as security for a loan and the loan is still outstanding at period-end...................... ©McGraw-Hill Companies..... Interest Revenue*.663 Accounts Receivable—Kramer Co...............500 9............785 285 9.........000 2. the business must disclose this information in notes to its financial statements............................ 30 Allowance for Doubtful Accounts........663 To record write-off of accounts.500 x ...........12 x 90/360]............10 x 60/360]. Striker..... 2005 48 Fundamental Accounting Principles............ 2..500 To record note received on account...........000 To record note received on account........................ 12. 9.... Rye. Striker.......... Rye....... This arrangement must be disclosed to satisfy the full-disclosure principle...... *Rounded to nearest dollar..................Problem 9-5B (Concluded) June 15 Notes Receivable—R............ the creditor can claim the amount of receivables identified in the pledge as collateral to cover the loan. 19 Cash Interest Revenue.. Striker........ 14 Cash...... 2.........000 x ... June 21 Notes Receivable—J. Notes Receivable—R.......... Inc.....500 To record cash received on note plus interest [$9.000 To record cash received on note plus interest [$2..... which means that if the business dishonors its obligations under the loan. 9...................... This is a requirement because the business has committed a portion of its assets to cover a specific portion of its liabilities....................

........ Allowance for Doubtful Accounts..250 X ................ Inc.....02 = $405 Required Adjustment: $405 ..... However. 31 Bad Debts Expense.. 51 51 To record estimated bad debts......... $454 Cr....$354 = $51 2005 June 30 Bad Debts Expense... the direct write-off method can result in accounts receivable overstatements.. a. and net income overstatements....... The direct method is a simple and straight-forward method of accounting for bad debts expense... Allowance Balance as of 6/30/05. (before adjustment) Required Balance: $20................ 454 454 To record estimated bad debts........ Less: Account written off......... The method required per GAAP is the allowance method. 2005 49 .53  $439 (rounded to nearest dollar) 2005 Mar... b. Allowance for Doubtful Accounts..... 31 Bad Debts Expense. Solutions Manual... $22...........SERIAL PROBLEM Serial Problem........ when the amounts are material... $354 Cr.................. 2..... 439 439 To record estimated bad debts..................... (100) Dr.........853 x ....... Success Systems (50 minutes) 1....... which will result in the best matching of a period’s expenses to revenues.. 3.....720 x ... It can also be justified if the amounts are immaterial............................ Many small business owners use the direct write-off method of recording bad debts expense........ Allowance Balance as of 3/31/05.................... bad debts expense understatements.. Chapter 9 ©McGraw-Hill Companies.. Allowance for Doubtful Accounts.02 = $454.. Bad debts expense is recorded as 1% of total revenues: $43. Bad debts expense is recorded as 2% of accounts receivable: c.......40  $454 (rounded to nearest dollar) 2005 Mar.....01 = $438..........

687 = 170.062 + 884 $59..373 + 11.. cash provided from the operations of the business during the year along with the existing liquid assets are used to satisfy these obligations...1% $21. Accounts receivable turnover for 2003 ($ thousands): $491.Reporting in Action 1. As a benchmark it is preferable to have about 100. the company is in a better position at February 2. 17th Edition .. — BTN 9-1 ($ thousands) Accounts receivable.. $34..... 2003: Feb.771 = 144. deposits in banks.203 + 22.. and all highly liquid debt instruments with a maturity of three months or less at date of acquisition to be cash and cash equivalents........... 3... Krispy Kreme will probably not have trouble covering its current liabilities with its liquid assets in 2003.. 2003.. Looking solely at Krispy Kreme’s ability to satisfy current obligations using cash...292 + 26...894 + 9..8.373 2. less allowance for doubtful accounts of $1...904 + 15.....976 + 34.. Note 2 to Krispy Kreme’s consolidated financial statements reports its significant accounting policies... 2005 50 Fundamental Accounting Principles..0 times [Instructor note: Krispy Kreme’s accounts receivable turnover for 2002 is 16... Solution depends on the financial statement information obtained.. whichever is longer.] 5.453....549 ($34. Liquid assets as a percent of current liabilities ($ thousands) Feb.4% $52. ©McGraw-Hill Companies...373+ $26..533 Comments: Current liabilities are obligations that are due to be paid or liquidated within one year or one operating cycle of the business. 2. 2002. 3......017 + 2.00% in liquid assets to cover current liabilities... It reports that: “The Company considers cash on hand... Typically." 4...... 2002: $32.. as compared to February 3..... and receivables assets..... Inc..894)/2 = 16. investment.

9 times = 22 days Tastykake (Current Year): 365 days / 7.373 + $26.7 times 2. — BTN 9-2 Accounts Receivable Turnover: ($ thousands) Krispy (Current Year): Krispy (Prior Year): $491.5 times = 49 days Tastykake (Prior Year): 365 days / 7.233)/2 Tastykake (Prior Year): $166.21% Tastykake (Current Year): $3.752 + $22.. As of the most recent two years ($ thousands) Percent of uncollectibles = Allowance / (Allowance + Net receivable) Krispy (Current Year): $1.549 ($34.0 times = 23 days Krispy (Prior Year): 365 days / 16. on average.233 + $20.263 = 7. Krispy Kreme estimates about one-third of that at 4% to 5%.0 times $394.882) = 14. on average. to collect its accounts receivable.7 times = 47 days 3.855)/2 = 16.182 / ($1.752 / ($3.894)/2 = 16.373) = 4.606 + $20.9 times Tastykake (Current Year): $162.245 ($22. Chapter 9 ©McGraw-Hill Companies.894 + $19. to collect an accounts receivable while it takes Tastykake 47-49 days. 2005 51 .Comparative Analysis 1.5 times ($20.453 / ($1.606 / ($3.894) = 4. Krispy Kreme is more efficient at collecting accounts receivable as it takes 22-23 days.354 ($26.453 + $34.06% Krispy (Prior Year): $1.882 + $22. Inc.182 + $26. Average Collection Period (or “Average Days’ Sales Uncollected”) Krispy (Current Year): 365 days / 16.73% Tastykake (Prior Year): $3.44% Tastykake estimates about 14-15% of its receivables’ balance to be uncollectible. 4. Solutions Manual.233) = 14.772)/2 = 7.

a larger amount of current liquid assets. managers have some leeway in their application of accounting procedures. 2005 52 Fundamental Accounting Principles. the auditors will review this estimate for reasonableness. If the estimate for bad debts is reduced then less Bad Debts Expense will be recognized on the income statement resulting in a higher net income.. 2. 3.Ethics Challenge — BTN 9-3 1. Therefore. It also means that a lower allowance will be shown on the balance sheet. The owner or board should review for reasonableness the manager’s and accountant’s estimate for bad debts expense. There does not appear to be any economic justification for the change in estimate aside from the self-interest of the manager. Inc. Accounting procedures often allow for alternate methods or require the use of estimates. 17th Edition . ©McGraw-Hill Companies. if the company is audited. An informed owner or an effective board of directors will be aware of alternate accounting methods and how estimates can affect the financial statements. therefore. In this case it seems reasonable to doubt the motivation behind the manager’s recommendation for a lower bad debts expense. which will result in a higher realizable value for receivables and. Also.

Therefore.000. DETERMINING BAD DEBTS EXPENSE Bad debts expense represents the estimated amount of the year's sales that will become uncollectible.000. Of course. This year's bad debts expense of $59. they decrease the Allowance for Doubtful Accounts balance. Solutions Manual. some credit sales eventually prove to be uncollectible.950. The recognition of bad debts expense at the end of each year has the effect of increasing the Allowance for Doubtful Accounts balance. we report sales revenue in the period the sales are made. please call me. I hope this clarifies the matter for you. DETERMINING ALLOWANCE FOR DOUBTFUL ACCOUNTS The Allowance for Doubtful Accounts unadjusted balance at the end of the year is the cumulative result of recording bad debts expense and writing off specific accounts receivable in all past years. However. Prior to this year's bad debts expense calculation. Sid.. Inc. the cumulative total of writing off specific accounts was $16.000 is added to Allowance for Doubtful Accounts. the result is an ending balance of $43.Communicating in Practice — BTN 9-4 TO: SID OMAR FROM: (YOUR NAME) DATE: _______________ SUBJECT: Difference Between Bad Debts Expense and Allowance For Doubtful Accounts In accounting for credit sales and bad debts.000 is calculated as 2% of the annual sales of $2. even though some credit sales do not result in collections until the following period. The reported amount of bad debts expense is determined at the end of the accounting period by multiplying an estimated percent times the annual sales for the period.000 greater than the cumulative total of the past years' bad debts expenses. 2005 53 . If you have further questions. you could say that Allowance for Doubtful Accounts had an "abnormal" balance of $16. Chapter 9 ©McGraw-Hill Companies.000. when this year's bad debts expense of $59. Then. The fact that some accounts will become uncollectible is what gives rise to bad debts expense and the allowance for doubtful accounts. when specific accounts receivable are written off.

.. 2005 54 Fundamental Accounting Principles.975** * Total of each age category..... 2002.. Balance Sheet Presentation Accounts Receivable. $1..... Unadjusted balance............ Teamwork in Action — BTN 9-6 Instructor note: Computations for the aging schedule are in the Problem 9-4A solution........625 Allowance for Doubtful Accounts.333 Sears Card...Taking It to the Net — BTN 9-5 1.... 5........ $31.. The accounts receivable balances for Surg II.133 ($200 less than on MasterCard) ©McGraw-Hill Companies................ ** Net Realizable Accounts Receivable......... says it usually takes 2 to 3 years for balances to peak on new cards issued.............. and zero at December 31.025 1.. * 31.. 17th Edition ... 2002....55% 3..174.... 31 Bad Debts Expense........................ Business Week Activity — BTN 9-7 1................. 2001....734 at December 31... Inc..... 4.. allowance balance... $1..........625 credit December 31. 2. Inc.......... Note 2 reports that the accounts receivables were sold for an amount of $38.. Notes to its financial statements indicate that the company ceased operations on January 22..................... Adjusting entry Dec.............. David Wyss.........$1.... 2005.. chief economist at Standard and Poor’s... Cards Issued: Sears Gold MasterCard and Sears Card 2....... to the allowance. $45..220........025....... were $44... To record estimated bad debts. 31.... Sears MasterCard...625 * Req... and that the company’s operating assets were sold on that date.. The check figure for total estimated uncollectibles is $45.. 45..000* Less Allowance for Doubtful Accounts...025 credit 13...467.......400 credit Adj..

000 Current costs [$250........000 x 20%)........ $12........ accept credit cards and grant credit directly to selected customers..........3% + 2......000 Current costs [$250.....000 2......... The financial factors relevant to this decision relate to those impacting the computations in part 1... Also.........000 monthly cash sales Added Monthly Net Income (Loss) under Plan A Sales ($250........... Chapter 9 ©McGraw-Hill Companies..000) Net income (loss)....................000 x 24%)......000 x 24% x (1 – 30%)].000....... Inc....8% + 1.000 x 20% x (1 – 30%)]... Plan A is likely to result in earlier receipt of cash from credit card companies vis-à-vis cash receipts from customers who are granted credit terms.......000 Added Monthly Net Income (Loss) under Plan B Sales ($250.. Solutions Manual... (35...............Entrepreneurial Decision — BTN 9-8 1... (b) estimates of current and new costs..... $50............ (42.....000) New costs [$250........... (However.....000/12 = $250................ Manzi might consider implementing both plans—that is............000) Net income (loss)...... These include (a) estimates for both cash and credit sales.2%)].. The nonfinancial factors include (a) the effect of a new credit policy on customer relations. 2005 55 ...000) New costs [$250................ pursuing Plan A is likely to be less risky in that uncollectible accounts will not play a major role.................... Manzi is indifferent between Plans A and B because both yield an expected additional net income of $12...... (c) potential effects of future industry or economic factors.......7% + 1..000 x 24% x (6.. This “combination plan” would require additional analysis before implementation.......000 x 20% x (4.. and (d) the effect of these plans on current sales...) Moreover.. Computation of added monthly net income (loss) Note: $3. $12... (3....... (6.................. and (b) any additional burdens on Manzi from implementing this new policy... $60...0%)]........000 per month.....

Both Krispy Kreme and Tastykake present accounts receivable separately on the balance sheet and do so net of the allowance for doubtful accounts. An investor likely prefers the disclosure treatment by the two U. Also.5%. especially for businesses such as grocery and hardware stores. ©McGraw-Hill Companies. Some merchants often choose not to accept certain cards because the credit card fees are higher than others. presenting accounts receivable as a separate item on the balance sheet is more helpful than grouping it with notes receivable as Grupo Bimbo does. Grupo Bimbo presents. Specifically. companies. Both also report the amount of the allowance that has been deducted to arrive at the net accounts receivable balance. American Express has a range depending on volume of business and average price of merchandise sold which ranges from 2. Grupo Bimbo does not state that the balances are presented net of an allowance for doubtful accounts.. In the case of VISA compared to American Express. This can be a major part of its net profit margin. a merchant might have to pay as much as 1. the combined balances of notes and accounts receivable. 2. the presentation by Krispy Kreme and Tastykake allows individuals to see that bad debts have been accounted for and what effect the uncollectible accounts have on the gross accounts receivable balance. 17th Edition . VISA reports that the average transaction fee it charges merchants is 3%. Inc. It is not possible to discern from Grupo Bimbo’s presentation the respective balances of accounts receivable and notes receivable.95% to 4.Hitting the Road — BTN 9-9 Telephone calls to VISA and American Express are the source of information for this solution. Also. Global Decision— BTN 9-10 1.S. as a singular line item.5% more on its American Express transactions. 2005 56 Fundamental Accounting Principles.