Let’s Check (ULO 4 & 5)

Exercise 9
The two methods of recording account receivable transaction when cash discount is
involved are the Gross and Net Method. Net method is more theoretically correct because it
values the receivable at its realizable net value. Also, net sale provides a clear measure of
revenue from selling of goods. Uncertainty, purchasing company will not record or credit the
discount it should reflect as profit gain by the company. In general, the gross method is most
likely to used because it has no major impact in presenting financial statement. Therefore,
most of the company practice the gross method for recording receivables and sales.

Exercise 10
There is a two-fold theoretical rationale for the method of allowance over the method
of immediate write-off of bad debt accounting. Revenue at the point of sale is believed to be
acknowledged on the basis that legitimate liquid assets are the resulting receivables peding
collection, periodic revenue would be overstated to the extent that any receivables would
ultimately become uncollectible. The proper matching of revenue and expense allows gross
revenue to be partially offset in the financial statements by a bad debt expense charge based
on an estimate of receivables that will not be translated into cash from gross sales. Next, the
net realizable value must record all the account receivable on the balance sheet. On the other
hand, the allowance approach deducts the allowance for doubtful accounts from total
receivable. Lastly, it will be removed from the payments on the income statement for the debt
expense.

Exercise 11 MCQ
1. B
2. A
3. C
4. D
5. C
6. A
7. A
8. C

Exercise 13
By evaluating the collection of open receivables at the end of the year, the percentage
of the receivable method based on the maturity schedule calculates the annual debit of the
expense account and the credit of the receivable account. Average interest rates can be
derived from experience and applied to accounts in the respective age categories for each age
group identified by the analysis. This method can also be used as an individual review of
certain accounts, particularly those that are large in arrears, to evaluate the approximate
outstanding receivables. Based on the aforementioned review, the balance of the valuation
account is adjusted for a sum deemed ineligible.

Let’s Analyze (ULO 4 & 5)

PROBLEM 12
Sales made to Finley Farms  100,000
Amount received 50,000
Accounts receivable due from Finley farms, Inc 50,000

PROBLEM 13
Total net receivables 150,000
Less: Security deposit on lease of warehouse 30,000
Less: Selling price of unsold goods 26,000
Correct Account
Receivable 94,000

PROBLEM 14
Accounts receivable, 1/1/20 650,000
Add: Credit sales for 2020 2,700,000
Less: Sales returns for 2020 -75,000
Less: Accounts written off during 2020 -40,000
Less: Collections from customers during 2020 -2,150,000
Accounts receivable before allowances, 31/12/20 1,085,000

PROBLEM 15
Closing balance of allowance for uncollectible accounts 25,000
Opening Balance -30,000
Add: Allowance for uncollectible accounts—1/1/20 18,000
Less: Uncollectible accounts recovered -2,000
Uncollectible accounts expense 11,000

PROBLEM 16
Accounts Receivable (0-15 days) 100,000
50% of customers take 2% discount x 1% 1%
Allowance for discounts at 12/31 1000

PROBLEM 17
Beginning Balance 260,000
Write off 325,000
2% of credit sales 180,000
Allowance for uncollectible accounts 115,000
PROBLEM 18
Accounts receivable x 3% 30,000
Allowance for uncollectible accounts 30,000

PROBLEM 19
Accounts receivable – customers 7,800,000
Accounts receivable –
officers 500,000
Postdated checks from customers 400,000
Subscriptions receivable 800,000
Credit balances in customer’s accounts -200,000
Cash received in advance from customers -100,000
Expected bad
debts -150,000
Allowance for doubtful debt -200,000
Net Accounts Receivable 8,850,000

PROBLEM 20
Trade A/R 2,000,000
Trade Installment A/R 800,000
A/R from officers 150,000
A/R on post-dated checks 200,000
Correct balance of trade accounts
receivable 3,150,000