Professional Documents
Culture Documents
Type Classification
(1) Accounts receivable Current asset
(2) Notes receivable Current or noncurrent asset
depending on due date
(3) Other receivables Current or noncurrent asset
depending on due date
02. Other receivables include nontrade receivables such as interest receivable, loans to
company officers, advances to employees, and income taxes refundable.
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. 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.
5. 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.
EXERCISE 9-2
(a) (1) Dec. 31Bad Debts Expense....................................................................................... 8,000
[($840,000 – $40,000) X 1%]
Allowance for Doubtful Accounts .......................................... 8,000
EXERCISE 9-4
2002
2003
PROBLEM 9-2A
(a) $38,000
(b) $63,000 ($2,100,000 X 3%)
The balance in the Allowance for Doubtful Accounts is irrelevant.
(c) $47,400 [($840,000 X 6%) – $3,000]
(d) $53,400 [($840,000 X 6%) + $3,000]
(e) 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.
PROBLEM 9-4A
(a)
Accounts Receivable Amount % Estimated Uncollectible
0-30 days outstanding $100,000 1 $ 1,000
31-60 days outstanding 60,000 5 3,000
61-90 days outstanding 50,000 10 5,000
Over 90 days outstanding 30,000 25 7,500
$16,500
(e) 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
Cash ...................................................................................................................5,000
Accounts Receivable.......................................................................................... 5,000
(d) Beginning balance ......................................................................................................... $09,000
Add: Bad debt expense .................................................................................... 30,000
Recovery of account ................................................................................ 5,000
Deduct: Write-off of uncollectible accounts .................................................................... (37,000)
Ending balance .............................................................................................................. $ 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 estimator’s 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.
EXERCISE 9-7
Nov. 1Notes Receivable–A. Morgan ........................................ 18,000
Cash .............................................................. 18,000
2003
May 1 Cash ............................................................................................ 11,550
Notes Receivable–Jones .................................................... 10,500
Interest Receivable ............................................................. 700
Interest Revenue ($10,500 X 10% X 4/12) ......................... 350
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.
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
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
Nike’s receivable turnover and collection period are not as good as Reebok’s or the industry
average. Reebok’s 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
(c) CN’s short-term liquidity has deteriorated. The current and acid test ratios both declined. The