CHAPTER 9

Accounting for Receivables

Solutions
Complete the following: Questions #1,2 (p444) ; Brief Exercise #1 (p445)

01.

The three major types and classification of receivables are as follows:

02.

Type
Accounts receivable
Notes receivable

Classification
Current asset
Current
or
noncurrent
asset
depending on due date
(3) Other receivables
Current
or
noncurrent
asset
depending on due date
Other receivables include nontrade receivables such as interest receivable, loans to
company officers, advances to employees, and income taxes refundable.
(1)
(2)

BRIEF EXERCISE 9-1

(a)
Other receivables
(b)
Notes receivable
(c)
Accounts receivable
Complete the following: Questions #4, 5, 6, 7 (p444); Brief Exercises #3, 4, 5, 6 (p445); Exercises
#2, 3, 4 (p446-7); Problems #2, 4, 5 (p. 447-9)

04.

5.

Under the direct write-off method, bad debt losses are not estimated and no allowance account is
used. When an account is determined to be uncollectible, the loss is debited to Bad Debts
Expense. The direct write-off method makes no attempt to match bad debts expense to sales
revenues, or to show the net realizable value of the receivables in the balance sheet. The
disadvantages are that it may not match expenses with revenue and it does not accurately reflect
the collectible value of the accounts receivable on the balance sheet.
The essential features of the allowance method of accounting for bad debts are:
(1) Uncollectible accounts receivable are estimated in advance, in order to match the cost of
the bad debts against sales in the same accounting period in which the sale occurred.
(2) Estimated uncollectibles are debited to Bad Debts Expense and credited to Allowance for
Doubtful Accounts through an adjusting entry at the end of each period.
(3) Actual uncollectibles are debited to Allowance for Doubtful Accounts and credited to
Accounts Receivable at the time a specific account is written off.0

6.

Net realizable value is the difference between Accounts Receivable (normal debit balance) and
the Allowance for Doubtful Accounts (normal credit balance). Soo Eng should realize that the
decrease in net realizable value occurs when estimated uncollectibles are recognized in an
adjusting entry (debit Bad Debt Expense; credit Allowance for Doubtful Accounts). The write-off
of an uncollectible account reduces both accounts receivable and the allowance for doubtful
accounts by the same amount. Thus, net realizable value does not change.

7.

The two bases of estimating uncollectibles under the allowance method are (1) percentage of
sales (income statement method) and (2) percentage of receivables (balance sheet method). The
percentage of sales basis establishes a percentage relationship between the amount of credit
sales and expected losses from uncollectible accounts. This method emphasizes the matching of
expenses with revenues. Under the percentage of receivables basis, the balance in the allow-

ance for doubtful accounts is derived either (a) by applying a percentage estimate of bad debts to
total receivables or (b) from an analysis of individual customer accounts. This method
emphasizes net realizable value.
BRIEF EXERCISE 9-3
April 30Bad Debt Expense [($800,000 $50,000) X 2%] ............................................................
Allowance for Doubtful Accounts.....................................................................

15,000
15,000

BRIEF EXERCISE 9-4

(a)
Dec. 31
Bad Debts Expense [($400,000 X 1%) $3,000]................................. 1,000
Allowance for Doubtful Accounts ......................................................
(b)

Dec. 31

Bad Debts Expense [($400,000 X 1%) + $800].............................................

Allowance for Doubtful Accounts ......................................................

BRIEF EXERCISE 9-5

(a)
Jan. 24
Allowance for Doubtful Accounts.....................................................................
Accounts Receivable ............................................................................
(b)
Accounts receivable
Allowance for doubtful accounts
Net realizable value

1,000
4,800
4,800
7,000
7,000

(1) Before Write-Off

(2) After Write-Off

$700,000
0054,000
$646,000

$693,000
0047,000
$646,000

BRIEF EXERCISE 9-6

March 4
Accounts Receivable..............................................................................................
Allowance for Doubtful Accounts .................................................................

7,000
7,000

Cash ............................................................................................................ 7,000

Accounts Receivable ...................................................................................
EXERCISE 9-2
(a)
(1)
Dec. 31Bad Debts Expense.......................................................................................
[($840,000 $40,000) X 1%]
Allowance for Doubtful Accounts ..........................................
(2)

(b)

(1)

(2)

7,000
8,000
8,000

Dec. 31Bad Debts Expense.......................................................................................

Allowance for Doubtful Accounts ..........................................
[($110,000 X 10%) $2,500]

8,500

Dec. 31Bad Debts Expense.......................................................................................

[($840,000 $40,000) X 0.5%]
Allowance for Doubtful Accounts ..........................................

4,000

Dec. 31Bad Debts Expense.......................................................................................

Allowance for Doubtful Accounts ..........................................
[($110,000 X 5%) + $500]

6,000

8,500

4,000
6,000

EXERCISE 9-3
(a)
Accounts Receivable

Amount

0-30 days outstanding

31-60 days outstanding
61-90 days outstanding
Over 90 days outstanding

$65,000
017,600
008,500
006,400

(b)

Estimated Uncollectible
2
10
30
50

$1,300
01,760
02,550
03,200
$8,810

Mar. 31Bad Debts Expense...................................................................................................

Allowance for Doubtful Accounts ......................................................
($8,810 $1,800)

7,010
7,010

EXERCISE 9-4
2002
Dec.

31

Bad Debts Expense (2% X $400,000)....................................................................

Allowance for Doubtful Accounts .................................................................

8,000

Allowance for Doubtful Accounts............................................................................

Accounts ReceivableWorthy......................................................................

1,100

Accounts ReceivableWorthy ................................................................................

Allowance for Doubtful Accounts .................................................................

1,100

12

1,100

8,000

2003
May

11

June 12

Cash ............................................................................................................
Accounts ReceivableWorthy......................................................................
PROBLEM 9-2A

(a)
(b)
(c)
(d)
(e)

$38,000
$63,000 ($2,100,000 X 3%)
The balance in the Allowance for Doubtful Accounts is irrelevant.
$47,400 [($840,000 X 6%) $3,000]
$53,400 [($840,000 X 6%) + $3,000]
The weaknesses of the direct write-off method are two-fold. First, it does not match expenses
with revenues. Second, the accounts receivable are not stated at their estimated net realizable
value at the balance sheet date.

1,100
1,100

1,100

PROBLEM 9-4A
(a)
Accounts Receivable

(b)

(c)

(d)

(e)

Amount

Estimated Uncollectible
1
5
10
25

0-30 days outstanding

31-60 days outstanding
61-90 days outstanding
Over 90 days outstanding

$100,000
60,000
50,000
30,000

Bad Debts Expense

............................................................................................ 6,500

$ 1,000
3,000
5,000
7,500
$16,500

Allowance for Doubtful Accounts ($16,500 $10,000).............................................

6,500

Allowance for Doubtful Accounts .............................................................................. 2,000

Accounts Receivable ................................................................................................

2,000

Accounts Receivable ............................................................................................ 1,000

Allowance for Doubtful Accounts..............................................................................

1,000

Cash ................................................................................................................ 1,000

Accounts Receivable ................................................................................................

1,000

When an allowance is established, an estimate is made of the accounts receivable or credit sales
that will not be collected. An entry is made to record this estimate in the period in which the sale
occurred. This matches the estimated expense with the revenue it generated.
PROBLEM 9-5A

(a)

(b)

(c)

Bad Debts Expense (3% X $1,000,000) ........................................................................

Allowance for Doubtful Accounts .......................................................................

30,000
30,000

Allowance for Doubtful Accounts ...................................................................................

Accounts Receivable..........................................................................................

37,000

Accounts Receivable .....................................................................................................

Allowance for Doubtful Accounts .......................................................................

5,000

Cash ...................................................................................................................5,000
Accounts Receivable..........................................................................................

37,000

5,000
5,000

(d)

Beginning balance .........................................................................................................

Add:
Bad debt expense ....................................................................................
Recovery of account ................................................................................
Deduct: Write-off of uncollectible accounts ....................................................................
Ending balance ..............................................................................................................

$09,000
30,000
5,000
(37,000)
$ 7,000

(e)

When the percentage of sales (income statement) method is used to estimate bad debts,
recoveries of accounts previously written off do not directly affect the bad debts expense (They
may have an indirect effect, by influencing the estimators judgment regarding the appropriate
percentage of sales to use).
If the percentage of receivables (balance sheet) method of providing for bad debts was used, the
recovery would have a direct effect by increasing the balance is the allowance account and
therefore reducing the expense to be recorded in the year-end adjustment.
Complete the following: Question #12 (p444);
Brief Exercise #8 (p445); Exercises #7, 8 (p 447)

12. (a) Principal = $12,000 [($360 x 12/4) 9%]

(b) Interest = $5,400 [$30,000 x 6% x 3]
(c) Interest rate = 8.33% [($2,500 x 12/6) $60,000]
(d) Time = 3 months [$875 ($50,000 x 7%) 12]
BRIEF EXERCISE 9-8
(a) Total Interest = $15,000 [$900,000 x 10% x 2/12]
(b) Interest Rate = 8% [($526.67 x 12) $79,000]
(c) Principal = $56,000 [($1,680 x 12/6) 6%]
EXERCISE 9-7
Nov. 1Notes ReceivableA. Morgan ........................................
Cash ..............................................................
Dec.

Notes ReceivableWright. ...............................................

18,000
18,000
3,600

Sales .............................................................
16

31

3,600

Notes ReceivableBarnes ....................................

Accounts ReceivableBarnes .......................

4,000

Interest Receivable ...............................................

Interest Revenue*..........................................

331

4,000

331

*Calculation of interest revenue:

Morgan: $18,000 X 10% X 2/12 ......................................
Wright:
$3,600 X 6% X 1/12 ...........................................
Barnes: $4,000 X 8% X 0.5/12 .......................................
Total accrued interest ..................................................
EXERCISE 9-8
2002
May
1
Notes ReceivableJones..............................................................
Accounts ReceivableJones .............................................

$300
18
13
$331

10,500

Dec. 31 Interest Receivable................................................................................

Interest Revenue ($10,500 X 10% X 8/12) .........................
2003
May

10,500
700
700

Cash ............................................................................................ 11,550

Notes ReceivableJones ....................................................
Interest Receivable .............................................................
Interest Revenue ($10,500 X 10% X 4/12) .........................

10,500
700
350

Complete the following: Question #13 (p444) ; Brief Exercise #9 (p445)

13.

Accounts receivable are amounts owed by customers on account, resulting from the sale of
goods and services in the normal course of business operations (i.e., in trade). Interest is not
normally charged on accounts receivable unless they are overdue. Accounts receivable are
normally collected within 30 or so days.
Notes receivable represent claims that are evidenced by formal instruments of credit. A
promissory note gives the holder a stronger legal claim than one on an account receivable. As a
result, it is easier to sell to another party. Promissory notes are negotiable instruments, which
means they can be transferred to another party by endorsement. Interest is normally charged on
notes receivable for the entire maturity period. Notes receivable can extend for any period of
time, from 30 days to a number of years.

BRIEF EXERCISE 9-9

Jan.
10
Accounts ReceivableOpal ....................................................................................
Sales ..........................................................................................................

9,000

Feb.

9,000

Notes ReceivableOpal..........................................................................................
Accounts ReceivableOpal ........................................................................

9,000

Complete the following: Questions #16, 17 (p444) ; Brief Exercise #12 (p445);
Exercise #12 (p448); Problem #10 (p451)

16.

An increase in the current ratio normally indicates an improvement in short-term liquidity.

This may not always be the case because the composition of current assets may vary. In
order to determine if the increase is an improvement in financial health, other ratios that
should be considered include: Receivable turnover and collection period and inventory
turnover and days sales in inventory ratios.

9,000

17.

Receivables turnover = Net credit sales Average accounts receivable

Net credit sales = Receivables turnover x Average accounts receivable
Net credit sales = 8.0583 x $4,542,500
Net credit sales = $36,604,828

BRIEF EXERCISE 9-12

Receivables turnover
$11,006 [($420 + $380) 2] = 27.52 times
Collection period
365 days 27.52 = 13.27 days
EXERCISE 9-12
Nike
Receivables Turnover
$8,995.1 $1,569.4 = 5.73 times
365 days 5.73 = 63.7 days
Reebok
$2,899.9 $417.4 = 6.95 times
365 days 6.95 = 52.5 days
Nikes receivable turnover and collection period are not as good as Reeboks or the industry
average. Reeboks ratios are slightly better than the industry average.
PROBLEM 9-10A
(a)
2000

1999

Current ratio

$1,125 $1,903 = 0.6:1

$1,527 $1,777 = 0.9:1

Acid test ratio

$756 $1,903 = 0.4:1

$1,110 $1,777 = 0.6:1

(b)

2000

1999

Receivables turnover

$5,446 $770 = 7.1x

$5,261 $603.5 = 8.7x

Collection period

365 days 7.1

= 51.4 days

365 days 8.7

= 42.0 days

(c) CNs short-term liquidity has deteriorated. The current and acid test ratios both declined. The
receivables turnover is less and the average collection period is longer.