Methods of Accounting for Bad debts

Estimation of Doubtful Accouunts

Percent of Accounts ReceivableAging of Accts. Receivable

Percent of Sales

M eth o d s o f A c co u tn in g fo r B ad d eb ts
A L L O W A N C E M E TH O D D IR E C T W R ITE -O F F
M E TH O D
1. Recognition of Doubtful Dr. Doubtful Accounts Expense
Accounts NO ENTRY
Cr. Allowance for Doubtful
Acc
2. Write-off of Doubtful Dr. Allowance for Doubtful Acc Dr. Doubtful Accts. Exp
Accounts
Cr. Accounts Receivable Cr. Accounts Receivable
3. Recovery of Doubtful Dr. Accounts Receivable
Accounts No entry
Cr. Allowance for Doubful Acc

(Reverse entry of #2 :))

4. Cash Collection brought by Dr. Cash Dr. Cash

recovery Cr. Gain on recovery
Cr. Accounts Receivable

*IMPORTANT TO STUDY FURTHER : The effect of these 4 transactions on the elements of

financial statements (Assets, Liabilities, Equity, Income and Expenses) WIll it increase or
decrease?

SAMPLE PROBLEM

When the allowance method of recognizing bad debt expense is used, the entries at the time of
collection of an account previously written off would

A. Increase net income

B. Have no effect on net income

C. Decrease the allowance for doubtful accounts

D. Have no effect on the allowance for doubtful accounts

You don’t have to be the best. Just be better every single day.
Methods of Accounting for Bad debts
Estimation of Doubtful Accouunts

Percent of Accounts ReceivableAging of Accts. Receivable

Percent of Sales

E S T IM A T IN G B A D D E B T S

Percent of accounts receivable method

1. Manchester Company provided the following accounts abstracted from the unadjusted trial
balance on December 31, 2014:

Debit Credit

Accounts receivable 5,000,000

Allowance for doubtful accounts 40,000

Net credit sales 20,000,000

The entity estimated that 3% of the gross accounts receivable will become uncollectible.
What amount should be recognized as doubtful accounts expense for 2014?

A. 110,000 C. 190,000

B. 150,000 D. 600,000

You don’t have to be the best. Just be better every single day.
Methods of Accounting for Bad debts
Estimation of Doubtful Accouunts

Percent of Accounts ReceivableAging of Accts. Receivable

Percent of Sales

Aging of receivables

2. Tara Company provided the following information pertaining to accounts receivable on

December 31,2014:

Days Estimated Estimated

outstanding Amount uncollectible

0- 60 1,200,000 1%

61 - 120 900,000 2%

Over 120 1,000,000 60,000

3,100,000

During 2014, the entity wrote off P70,000 in accounts receivable and recovered P40,000
that had been written off in prior years. On January 1, 2014, the allowance for uncollectible
accounts was P 100,000. Under the aging method, what amount of allowance for
uncollectible accounts should be reported on December 31,2014?

A 90,000 C. 130,000

B. 100,000 D. 190,000

You don’t have to be the best. Just be better every single day.
Methods of Accounting for Bad debts
Estimation of Doubtful Accouunts

Percent of Accounts ReceivableAging of Accts. Receivable

Percent of Sales

3. Orr Company prepared an aging of accounts receivable on December 31,2014 and

determined that the net realizable value of the accounts receivable was P2,500,000.

Allowance for doubtful accounts on January 1 280,000

Accounts written off as uncollectible 230,000

Accounts receivable on December 31 2,700,000

Uncollectible accounts recovery 50,000

For the year ended December 31, 2014, what amount should be recognized as doubtful
accounts expense?

A . 100,000 C. 200,000

B. 150,000 D. 230,000

Percent of sales method

4. At year-end, Barr Company reported net sales of P7,100,000 and allowance for doubtful
accounts with debit balance of P16,000 before adjustment. The entity estimated the
uncollectible accounts receivable at 2% of net sales. What is the allowance for doubtful
accounts at year-end?

A. 126,000 C. 144,500

B. 142,000 D. 158,000

You don’t have to be the best. Just be better every single day.
Methods of Accounting for Bad debts
Estimation of Doubtful Accouunts

Percent of Accounts ReceivableAging of Accts. Receivable

Percent of Sales

5. Ladd Company provided the following data for the current year:

Allowance for doubtful accounts - January 1 180,000

Sales 9,500,000
Sales returns and allowances 800,000
Sales discounts 200,000
Accounts written off as uncollectible 200,000

The entity provided for doubtful accounts expense at the rate of 3% of net sales. What is
the allowance for doubtful accounts at year-end?

A. 235,000 C. 265,000

B. 241,000 D. 435,000

-End of representative problems-

Note: After you have fully understood the application of concepts

in these given problems, you may now continue solving more problems from easy-moderate-
difficult. There are more challenging problems out there but make sure that you have mastered
the concepts embedded in this material before proceeding on the pro level. :) /MAP :)

You don’t have to be the best. Just be better every single day.