Accounting for Trade Receivables (Accounts Receivable)- Continuation

Write your answer on the space before each number.

1. How are accounts receivable subsequently measured?
At recoverable historical cost (or net realizable value)
2.How do you define an allowance for doubtful accounts?
A contra-asset (deduction) to accounts receivable when determining net realizable value
3. What are the methods of computing for doubtful accounts expense?
(a) Percentage of net credit sales, (b) Percentage of receivables, and (c) Aging of receivables

Skill-building Activities
PROBLEM SOLVING. PROVIDE WHAT IS ASKED IN EACH ITEM.
1. Provide the journal entries of the following using the Allowance Method and Direct Method:
a. Accounts receivable of P15,000 is found to be doubtful of collection;
b. The P15,000 doubtful account is deemed worthless (uncollectability is certain) and needs
to be written-off; and
c. The P15,000 account previously written-off is subsequently recovered;

Allowance Method Direct Method

Collectability becomes doubtful
a.
Bad debt expense 15,000
Allowance for bad debt expense 15,000 No entry
to record bad debt expense

Write-off
b. Bad debt expense 15,000
Allowance for bad debt 15,000 Accounts receivable 15,000
Accounts receivable 15,000 to record bad debt expense
to record the write-off accounts receivable

Recovery
c.
Accounts receivable 15,000
Allowance for bad debts 15,000 No entry
To reverse previous write-off

Cash 15,000 Cash 15,000

Accounts receivable 15,000 Gain on recovery 15,000
To record the collection of accounts receivable To record the collection of accounts receivable

2. ABC Co. has the following information on December 31, 20x1 before any year-end adjustments:
Allowance for doubtful accounts, Jan. 1 8,000
Write-offs 5,000
Recoveries 1,000
Sales (including cash sales of P100,000) 600,000
Sales returns and discounts (including P1,000
sales returns on cash sales) 6,000
Accounts receivable, Dec. 31 150,000
Percentage of credit sales 2%

Compute for the following:

a. Bad debt expense
Total sales 600,000
Cash sales (100,000)
Gross credit sales 500,000
Sales returns and discounts on credit sales (6,000 - 1000) (5,000)
Net credit sales 495,000
Multiply by: Percentage of net credit sales 2%
Bad debt expense 9,900

b. Allowance for doubtful accounts on December 31

Allowance for doubtful accounts

8,000 Jan. 1
Write off 5,000 1,000 Recovery
9,900 bad debt expense
Dec. 31 13,900

c. Net realizable value of accounts receivable

Accounts receivable, Dec. 31 150,000
Allowance for doubtful accounts (13,900)
Accounts receivable, Dec. 31 131,100

3. ABC Co. has the following information:

Days outstanding Receivable balances % uncollectible
0 - 60 120,000 1%
61 - 120 90,000 2%
Over 120 100,000 6%
Total accounts 310,000
receivable

During the year, ABC Co. wrote off P7,000 receivables and recovered P4,000 that had been
written off in prior years. The allowance for doubtful accounts has a beginning balance of P2,000.
Compute for:
a. doubtful accounts expense for the year; and
 Days Receivable % uncollectible Required allowance
outstanding balances (b) (c) = (a) x (b)
(a)
0 - 60 120,000 1% 1,200
61 – 120 90,000 2% 1,800
Over 120 100,000 6% 6,000
Totals 310,000 9,000

Allowance for doubtful accounts

2,000 beg. bal.

Write off 7,000 4,000 Recoveries
10,000 doubtful account expense
(squeeze)
End bal. 9,000

b. net realizable value (recoverable historical cost or carrying amount) of accounts receivable

The recoverable historical cost of the receivables as of year-end is P301,000 (P310,000 -

P9,000).

Check for Understanding (Graded Quiz)

Multiple Choice:
1. Why is the allowance method preferred over the direct write-off method of accounting for
bad debts?
a. Allowance method is used for tax purposes.
b. Estimates are used.
c. Determining worthless accounts under direct write-off method is difficult to do.
d. Improved matching of bad debt expense with revenue.

2. Wellington Corp. has outstanding accounts receivable totalling 2.54 million as of December
31 and sales on credit during the year of 12.8 million. There is also a debit balance of 6,000
in the allowance for doubtful accounts. If the company estimates that 1% of its net credit sales
will be uncollectible, what will be the balance in the allowance for doubtful accounts after the
year-end adjustment to record bad debt expense?
a. 25,400.
b. 31,400.
c. 122,000.
d. 134,000

II. True or False: Write your answer on the space provided.

FALSE 3. The percentage-of-receivables approach of estimating uncollectible accounts
emphasizes matching over valuation of accounts receivable.
FALSE 4. The percentage-of-sales method results in a more accurate valuation of receivables
on the balance sheet.

III. Problem Solving

5. ABC Co. sells to wholesalers on terms 2/15, net 30. An analysis of ABC Co.’s accounts
receivable on December 31 follows:

Age in Days Receivable balances

0 - 15 100,000
16 - 30 60,000
31 - 60 50,000
61 - 90 40,000
91-120 30,000
121 - 150 20,000
Total accounts receivable 300,000

ABC Co. uses the aging of accounts receivables method. The estimated percentage of collectability
are as follows:

Accounts that are overdue for less than 31 days 97%

Accounts that are overdue 31- 60 days 90%
Accounts that are overdue 61 - 90 days 85%
Accounts that are overdue 91 - 120 days 65%
Accounts that are overdue for over 120 days 40%

The allowance for doubtful accounts has a balance of P8,000 as of January 1. No write-offs or
recoveries were made during the year.
Compute for:
a. Balance of allowance for doubtful accounts on December 31; and

Days past due Receivable % Required allowance

balances uncollectible (a) = (a) x (b)
(a) (b)
Not due (cash discounts available) -0 to
15 days of age 100,000 None -

Not due (cash discount forfeited) – 16 60,000 None -

to 30 days of age

1-30 days past due 50,000 3% 1,500

31-60 days past due 40,000 10% 4,000

61-90 days past due 30,000 15% 4,500

91-120 days past due 20,000 35% 7,000

Totals 300,000 17,000

b. The doubtful accounts expense for the year

Allowance for doubtful accounts

8,000 Jan. 1
- recoveries
Write- offs - 9,000 doubtful account expense
(squeeze)
End bal. 17,000