Solution manual financial accounting 4e by wild chapter07

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Chapter 7
Reporting and Analyzing Receivables
QUESTIONS
1.

When customers use credit cards, the selling companies can avoid having to directly
evaluate the credit standing of its customers. They also avoid the risk of bad debts and often
are paid cash from the credit card company more quickly than if customers were granted
credit directly. Moreover, they hope to increase sales, and net income, from the added
convenience to buyers.

2.

Revenues and expenses usually are not matched under the direct write-off method because
the revenues recorded from the uncollectible accounts often appear on the income statement
of one period while the bad debts expenses of those revenues appear on the income
statement of a later period when the account(s) is known to be uncollectible.

3.

The accounting principle of materiality suggests that the requirements of accounting
standards can be ignored if their effect on the financial statements is unimportant to their
users’ business decisions.

4.

Writing off a bad debt against the Allowance account does not reduce the estimated
realizable value of a company’s accounts receivable because the write-off reduces the
balances of both Accounts Receivable and the Allowance for Doubtful Accounts by equal

amounts. This means the difference between them (called estimated realizable value)
remains the same.

5.

The adjusted balances of Bad Debts Expense and Allowance for Doubtful Accounts are
virtually never equal because the expense amount reflects only the events of the current
period, and the allowance is the accumulated result of events over a number of prior periods.
The only way that they could be equal would be if write-offs during the prior period exactly
equaled the beginning balance of the Allowance account.

6.

Creditors prefer notes receivable to accounts receivable because the notes can be more
easily converted into cash before they are due by discounting (or selling) them to a financial
institution. Also, a note represents a clear written acknowledgment by the debtor of both the
debt and its amount and terms.

7.

Best Buy does not mention uncollectible accounts in its notes to its financial statements,
and does not list its receivables as ―net‖ of any allowance for uncollectibles, probably
because uncollectible accounts are immaterial.

8.

Circuit City uses the allowance method to account for doubtful accounts as evidenced by the
receivables being reduced by an allowance on the balance sheet. The realizable value of
accounts receivable as of February 28, 2005, is its net amount of $172,995,000.

9.

Apple’s gross accounts receivable at September 25, 2004 are ($ millions) $774 + $47 = $821.
Apple believes that the percent of accounts receivable that are uncollectible is $47/$821 =
5.7%

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QUICK STUDIES
Quick Study 7-1 (15 minutes)
1.

Cash ............................................................................... 19,000
Credit Card Expense* ................................................... 1,000
Sales.........................................................................

20,000

To record credit card sales less fees.
*$20,000 x 5%

Cost of Goods Sold ...................................................... 15,000
Merchandise Inventory ...........................................

15,000

To record cost of sales.

2.

Accounts Receivable—Credit Card Cos..................... 4,800
Credit Card Expense* ...................................................
200
Sales.........................................................................

5,000

To record credit card sales less fees.
*$5,000 x 4%

Cost of Goods Sold ...................................................... 3,000
Merchandise Inventory ...........................................

3,000

To record cost of sales.

5 days later
Cash ............................................................................... 4,800
Accounts Receivable—Credit Card Cos...............

4,800

To record cash receipts.

Quick Study 7-2 (15 minutes)
1.
Oct. 31 Allowance for Doubtful Accounts ...........................
Accounts Receivable—C. Green .......................

800
800

To write off account.

2.
Dec. 9 Accounts Receivable—C. Green* ............................
Allowance for Doubtful Accounts .....................

300
300

To reinstate a written off account.
*If there is a strong belief that the remaining $500 will be
collected soon, then the full $800 balance can be reinstated.

9 Cash ...........................................................................
Accounts Receivable—C. Greem ......................

300
300

To record payment on a receivable.
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Quick Study 7-3 (15 minutes)
1.
Dec. 31 Bad Debts Expense ................................................
Allowance for Doubtful Accounts...................

885
885

To record estimate of uncollectibles.
Desired balance in allowance = $99,000 x 1.5%= $1,485 cr.
Adjustment required = $1,485 - $600 cr. = $885

2.

Desired balance in allowance = $1,485 (part 1)
Adjustment required = $1,485 cr. + $300 dr. = $1,785

Quick Study 7-4 (10 minutes)
Dec. 31 Bad Debts Expense ................................................ 1,400
Allowance for Doubtful Accounts...................

1,400

To record estimate of uncollectibles
($280,000 x 0.5%).

Quick Study 7-5 (15 minutes)
Aug. 2

Notes Receivable—R. Albany ..........................
Accounts Receivable—R. Albany ..............

6,000
6,000

To record receipt of note on account.

Oct. 31

Maturity date
Cash ....................................................................
Notes Receivable—R. Albany ....................
Interest Revenue .........................................

6,180
6,000
180

To record cash received on note plus
interest ($6,000 x 12% x 90/360).

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Quick Study 7-6 (15 minutes)
Dec. 31

Interest Receivable ............................................
Interest Revenue .........................................

50
50

To record the year-end adjustment for
interest earned ($10,000 x 6% x 30/360).

Jan. 15

Maturity date
Cash ....................................................................
Interest Receivable .....................................
Interest Revenue .........................................
Notes Receivable ........................................

10,075
50
25
10,000

To record cash received on note plus interest.

Quick Study 7-7 (10 minutes)

Accounts receivable turnover =

Net sales
Average accounts receivable
$854,200
($153,400 + $138,500) / 2

=

5.9 times

Interpretation: An accounts receivable turnover of 5.9 implies that the
company’s average accounts receivable balance is converted into cash 5.9
times per year. The 5.9 turnover is about 21% lower than the average
turnover of 7.5 for its competitors. The company needs to identify the
cause of this poor performance and rectify the situation to at least compete
at the average level.

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EXERCISES
Exercise 7-1 (20 minutes)
Apr. 8 Cash ........................................................................ 8,064
Credit Card Expense* ............................................
336
Sales .................................................................

8,400

To record credit card sales less 4% fee.
*($8,400 x .04)

8 Cost of Goods Sold ......................................................
6,000
Merchandise Inventory ..........................................

6,000

To record cost of sales.

12 Accounts Receivable—Continental ..................... 5,460
Credit Card Expense* ............................................
140
Sales .................................................................

5,600

To record credit card sales less 2.5% fee.
*($5,600 x .025)

12 Cost of Goods Sold ......................................................
3,500
Merchandise Inventory ..........................................

3,500

To record cost of sales.

20 Cash ........................................................................ 5,460
Accounts Receivable—Continental ................

5,460

To record cash received on credit sales less fees.

Exercise 7-2 (25 minutes)
Part 1
GENERAL LEDGER

Accounts Receivable
Nov. 5 4,615 Nov. 21 209
10 1,350
13
832
30 2,713
Bal. 9,301

Sales
Nov. 5

10
13
30

4,615
1,350
832
2,713

Sales Returns and
Allowances
Nov. 21 209

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Exercise 7-2 (concluded)
Part 1—continued
ACCOUNTS RECEIVABLE LEDGER

Nov. 5
30
Bal.

Ski Shop

4,615
2,713
7,328

Welcome Enterprises
Nov. 10 1,350

Zia Natara
Nov. 13 832 Nov. 21
Bal.

209

623

Part 2
Morales Company
Schedule of Accounts Receivable
November 30, 2008
Ski Shop .................................................................................
Welcome Enterprises ...........................................................
Zia Natara ...............................................................................
Total ........................................................................................

$7,328
1,350
623
$9,301

Comparison: The total of the Schedule of Accounts Receivable ($9,301) is

proved with the balance of the Accounts Receivable controlling T-account
from Part 1 ($9,301).

Exercise 7-3 (20 minutes)
Dec. 31 Bad Debts Expense ..................................................... 4,875
Allowance for Doubtful Accounts........................

4,875

To record estimated bad debts expense
(.005 x $975,000).

Feb. 1 Allowance for Doubtful Accounts..............................
Accounts Receivable—P. Park ............................

580
580

To write off an account.

June 5 Accounts Receivable—P. Park ..................................
Allowance for Doubtful Accounts ........................

580
580

To reinstate an account.

June 5 Cash ..............................................................................
Accounts Receivable—P. Park ............................

580
580

To record cash received on account.

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Exercise 7-4 (15 minutes)
a.
Dec. 31 Bad Debts Expense* ..................................................... 685
Allowance for Doubtful Accounts........................

685

To record estimated bad debts expense.
*

Unadjusted balance
Estimated balance ($55,000 x .02)
Required adjustment

= $ 415
= 1,100

= $ 685

credit
credit
credit

b.
Dec. 31 Bad Debts Expense** ....................................................1,391
Allowance for Doubtful Accounts........................

1,391

To record estimated bad debts expense.
**

Unadjusted balance
Estimated balance ($55,000 x .02)
Required adjustment

= $ 291
= 1,100
= $1,391

debit
credit
credit

Exercise 7-5 (20 minutes)
July 4 Accounts Receivable ............................................ 7,245
Sales .................................................................

7,245

To record sales on credit.

4 Cost of Goods Sold ......................................................
5,000
Merchandise Inventory ..........................................

5,000

To record cost of sales.

9 Cash ....................................................................... 19,200
Factoring Fee Expense* .......................................
800
Accounts Receivable ......................................

20,000

To record sale of receivable. *($20,000 x .04)

17 Cash ....................................................................... 5,859
Accounts Receivable ......................................

5,859

To record cash received on account.

27 Cash ....................................................................... 10,000

Notes Payable ..................................................

10,000

To record cash from a loan.
Note to Financial Statements
Accounts receivable in the amount of $12,500 are pledged
as security for a $10,000 note payable to Main Bank.

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Exercise 7-6 (15 minutes)
Nov. 1 Notes Receivable—K. White .............................
Accounts Receivable—K. White .................

6,000
6,000

To record receipt of note on account.

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

80

80

To record interest earned
[$6,000 x .08 x 60/360].

Apr. 30 Cash ....................................................................
Notes Receivable—K. White .......................
Interest Revenue ..........................................
Interest Receivable ......................................

6,240
6,000
160
80

To record cash received on note plus
interest earned [$6,000 x .08 x 120/360].

Exercise 7-7 (20 minutes)
Mar. 21 Notes Receivable—T. Jackson ............................ 9,500
Accounts Receivable—T. Jackson ................

9,500

To record receipt of note on account.

Sept. 17 Accounts Receivable—T. Jackson ...................... 9,880
Interest Revenue .............................................
Notes Receivable—T. Jackson ......................

380
9,500

To record note dishonored plus interest
earned [$9,500 x .08 x 180/360 = $380].

Dec. 31 Allowance for Doubtful Accounts ....................... 9,880
Accounts Receivable—T. Jackson ................

9,880

To write off an account.

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Exercise 7-8 (25 minutes)
2007
Dec. 13 Notes Receivable—M. Lee.................................... 9,500
Accounts Receivable—M. Lee .......................

9,500

To record receipt of note on account.

31 Interest Receivable ...............................................
Interest Revenue .............................................

38
38

To record interest earned [$9,500 x .08 x 18/360].

2008
Feb. 11 Cash ....................................................................... 9,627
Interest Revenue ............................................
Interest Receivable .........................................
Notes Receivable—M. Lee .............................

89*
38
9,500

To record cash received on note plus
interest. [$9,500 x .08 x (60-18)/360=$89 rounded]

Mar. 3 Notes Receivable—Tomas Co. ............................ 5,000
Accounts Receivable-Tomas Co ...................

5,000

To record receipt of note on account.

17 Notes Receivable—H. Cheng ............................... 2,000
Accounts Receivable—H. Cheng ..................

2,000

To record receipt of note on account.

Apr. 16 Accounts Receivable—H. Cheng ........................ 2,015
Interest Revenue .............................................
Notes Receivable—H. Cheng .........................

15
2,000

To record receivable for dishonored
note plus interest [$2,000 x .09 x 30/360].

May 1 Allowance for Doubtful Accounts ....................... 2,015
Accounts Receivable—H. Cheng ..................

2,015

To write off account.

June 1 Cash ....................................................................... 5,125
Interest Revenue .............................................
Notes Receivable—Tomas Co .......................

125
5,000

To record cash received on note with

interest [$5,000 x .10 x 90/360].

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Exercise 7-9 (15 minutes)
Year 2007 accounts receivable turnover:
$336,000
($41,400 + $34,800)/2

= 8.8 times

Year 2008 accounts receivable turnover:
$405,000
($44,800 + $41,400)/2

= 9.4 times

Analysis: Raheem Company turned over its accounts receivable 0.6 (9.4 – 8.8)
times more in 2008 than in 2007. This may indicate that the company has
tightened its credit policy or has improved its collection efforts. Also, relative to
competitors’ turnover of 7, Raheem is performing better than average.

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PROBLEM SET A
Problem 7-1A (30 minutes)
June 4 Accounts Receivable—N. Morris .............................
Sales .....................................................................

650
650

To record sales on credit.

4 Cost of Goods Sold ......................................................... 400
Merchandise Inventory .............................................

400

To record cost of sales.

5 Cash ............................................................................
Credit card expense* .................................................
Sales .....................................................................

6,693
207
6,900

To record credit card sales less fee. *($6,900 x .03)

5 Cost of Goods Sold .........................................................4,200
Merchandise Inventory .............................................

4,200

To record cost of sales.

6 Accounts Receivable—Access ................................
Credit card expense* .................................................
Sales .....................................................................

5,755
117
5,872

To record credit card sales less fee. *($5,872 x .02)(rounded)

6 Cost of Goods Sold .........................................................3,800
Merchandise Inventory .............................................

3,800

To record cost of sales.

8 Accounts Receivable—Access ................................
Credit card expense* .................................................
Sales .....................................................................

4,248
87
4,335

To record credit card sales less fee. *($4,335 x .02)(rounded)

8 Cost of Goods Sold .........................................................2,900
Merchandise Inventory .............................................

2,900

To record cost of sales.

10 No journal entry required.

13 Allowance for Doubtful Accounts ............................
Accounts Receivable—A. McKee .......................

429
429

To write off account due.

17 Cash ............................................................................ 10,003
Accounts Receivable—Access ..........................

10,003

To record cash received from credit card co. ($5,755 + $4,248).

18 Cash ............................................................................
Sales Discounts* .......................................................
Accounts Receivable—N. Morris .......................

637
13
650

To record cash received less discount. *($650 x .02)
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Problem 7-2A (35 minutes)
2007
a.

Accounts Receivable ......................................... 1,345,400
Sales ..............................................................

1,345,400

To record sales on account.

Cost of Goods Sold ......................................................

975,000
Merchandise Inventory ..........................................

975,000

To record cost of sales.

b.

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

18,300
18,300

To write off accounts.

c.

Cash .....................................................................
Accounts Receivable ...................................

669,200
669,200

To record cash received on account.

d.

Bad Debts Expense ............................................

Allowance for Doubtful Accounts ..............
To record estimated bad debts.
*

28,169
28,169

*

Beginning receivables ......................
Credit sales .......................................
Collections ........................................
Write-offs ...........................................
Ending receivables ...........................
Percent uncollectible ........................
Required ending allowance..............
Unadjusted balance ..........................
Adjustment to the allowance ...........

$

0
1,345,400
(669,200)
(18,300)
657,900
x 1.5%
9,869** Cr.
18,300 Dr.
$ 28,169 Cr.

** rounded to nearest dollar

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Problem 7-2A (Concluded)
2008
e.
Accounts Receivable .............................................. 1,525,600
Sales ...................................................................

1,525,600

To record sales on account.

Cost of Goods Sold ......................................................
1,250,000
Merchandise Inventory ..........................................

1,250,000

To record cost of sales.

f.

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

27,800
27,800

To record write-off of accounts.

g.

Cash ......................................................................... 1,204,600
Accounts Receivable ........................................

1,204,600

To record cash received on account.

h.

Bad Debts Expense.................................................
Allowance for Doubtful Accounts ...................
To record estimated bad debts.
*

32,198
32,198

*

Beginning receivables ............................
Credit sales..............................................
Collections...............................................
Write-offs .................................................
Ending receivables .................................
Percent uncollectible ..............................
Required ending allowance ....................
Unadjusted balance
Beginning (Cr.) ...................................... $ 9,869
Write-offs (Dr.) ....................................... 27,800
Adjustment to the allowance ..................

$ 657,900
1,525,600
(1,204,600)
(27,800)
951,100
x 1.5%
14,267** Cr.

$

17,931
32,198

Dr.
Cr.

** rounded to nearest dollar

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Problem 7-3A (35 minutes)
Part 1
a. Expense is 1.5% of credit sales
Dec. 31 Bad Debts Expense............................................... 85,230
Allowance for Doubtful Accounts .................

85,230

To record estimated bad debts
[$5,682,000 x .015].

b. Expense is 1% of total sales
Dec. 31 Bad Debts Expense............................................... 75,870
Allowance for Doubtful Accounts .................

75,870

To record estimated bad debts
[($1,905,000 + $5,682,000) x .01].

c. Allowance is 5% of accounts receivable
Dec. 31 Bad Debts Expense............................................... 80,085

Allowance for Doubtful Accounts .................
To record estimated bad debts.*

*

80,085

Unadjusted balance ........................................................
$16,580 debit
Estimated balance ($1,270,100 x 5%) ...........................
63,505 credit
Required adjustment ......................................................
$80,085 credit

Part 2
Current assets
Accounts receivable ...........................................$1,270,100
Less allowance for doubtful accounts ............. (68,650)*
Or: Accounts receivable (net of $68,650*
uncollectible accounts) ...................................

$1,201,450

$1,201,450

* Adjustment to the allowance ......................................
$85,230 credit
Unadjusted allowance balance ..................................
16,580 debit
Adjusted balance .........................................................

$68,650 credit

Part 3
Current assets
Accounts receivable ...........................................$1,270,100
Less allowance for doubtful accts. ................... (63,505)**
Or: Accounts receivable (net of $63,505**
uncollectible accounts) ...................................

$1,206,595

$1,206,595

** See computations in Part 1c.

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Problem 7-4A (35 minutes)
Part 1
Calculation of the estimated balance of the allowance for uncollectibles
Not due:
1 to 30:
31 to 60:
61 to 90:

Over 90:

$830,000 x .0125 =
254,000 x .0200 =
86,000 x .0650 =
38,000 x .3275 =
12,000 x .6800 =

$10,375
5,080
5,590
12,445
8,160
$41,650 credit

Part 2
Dec. 31 Bad Debts Expense.............................................. 27,150
Allowance for Doubtful Accounts ................
To record estimated bad debts.
*

27,150

*

Unadjusted balance ...........................
Estimated balance .............................

$14,500 credit
41,650 credit

Required adjustment .........................

$27,150 credit

Part 3
Writing off the account receivable in 2009 will not directly affect year 2009
net income. The entry to write off an account involves a debit to Allowance
for Doubtful Accounts and a credit to Accounts Receivable, both of which
are balance sheet accounts. Net income is affected only by the annual
recognition of the estimated bad debts expense, which is journalized as an
adjusting entry. Net income for Year 2008 (the year of the original sale)
included an estimated expense for write-offs such as this one.

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Problem 7-5A (75 minutes)
Part 1
2007
Dec. 16 Notes Receivable—D. Todd................................ 10,800
Accounts Receivable—D. Todd ...................

10,800

To record note received on account.

31 Interest Receivable ..............................................
Interest Revenue ...........................................

36
36

To record interest earned
[$10,800 x .08 x 15/360 = $36].

2008
Feb. 14 Cash ...................................................................... 10,944
Interest Revenue* ..........................................
Interest Receivable........................................
Notes Receivable—D. Todd..........................

108
36
10,800

To record cash received on note with interest.
*[$10,800 x 0.08 x 45/360 = $108]

Mar. 2 Notes Receivable—Midnight Co ........................
Accounts Receivable—Midnight Co. ...........

6,120
6,120

To record note received on account.

17 Notes Receivable—A. Privet ..............................
Accounts Receivable—A. Privet

2,400
2,400

To record note received on account.

Apr. 16 Accounts Receivable—A. Privet ........................
Interest Revenue ...........................................
Notes Receivable—A. Privet ........................

2,414
14
2,400

To record receivable for dishonored
note plus interest [$2,400 x .07 x 30/360= $14].

June 2 Accounts Receivable—Midnight Co. .................
Interest Revenue* ..........................................
Notes Receivable—Midnight Co ..................

6,242
122
6,120

To record receivable for dishonored note

[$6,120 x 0.08 x 90/360 = $122] *Rounded to
nearest dollar.

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Problem 7-5A (Concluded)
July 17 Cash ......................................................................
Interest Revenue* ..........................................
Accounts Receivable—Midnight Co. ...........

6,306
64
6,242

To record cash received on account
plus additional interest.
*[$6,242 x .08 x 46/360= $64 (rounded)]

Aug. 7 Notes Receivable—Mulan...................................
Accounts Receivable—Mulan ......................

7,450
7,450

To record note received on account.

Sept. 3 Notes Receivable—N. Carson ............................
Accounts Receivable—N. Carson................

2,120
2,120

To record note received on account.

Nov. 2 Cash ......................................................................
Interest Revenue* ..........................................
Notes Receivable—N. Carson ......................

2,155
35
2,120

To record cash received on note plus interest
*($2,120 x .10 x 60/360 = $35 rounded).

5 Cash ......................................................................
Interest Revenue* ..........................................
Notes Receivable—Mulan.............................

7,636
186
7,450

To record cash received on note plus

Interest. *($7,450 x .10 x 90/360 = $186)

Dec. 1 Allowance for Doubtful Accounts......................
Accounts Receivable—A. Privet ..................

2,414
2,414

To record write-off of account.

Part 2
Analysis Component: When a business pledges its receivables as security
for a loan and the loan is still outstanding at period-end, the business must
disclose this information in notes to its financial statements. This is a
requirement because the business has committed a portion of its assets to
cover a specific portion of its liabilities, which means that if the business
dishonors its obligations under the loan, the creditor can claim the amount
of receivables identified in the pledge as collateral to cover the loan. This
arrangement must be disclosed to satisfy the full-disclosure principle.
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PROBLEM SET B
Problem 7-1B (30 minutes)
Aug. 4 Accounts Receivable—M. Carpenter ......................

Sales.....................................................................

3,700
3,700

To record sales on credit.

10

11

14

15

18
22

25

Cost of Goods Sold .........................................................2,000
Merchandise Inventory ..............................................
To record cost of sales.
Cash ...........................................................................
5,044
Credit Card Expense* ...............................................
156
Sales.....................................................................
To record credit card sales less fee. *($5,200 x .03)
Cost of Goods Sold .........................................................2,800

Merchandise Inventory ..............................................
To record cost of sales.
Accounts Receivable—Aztec ...................................
1,225
Credit card expense* ................................................
25
Sales.....................................................................
To record credit card sales less fee. *($1,250 x .02)
Cost of Goods Sold ......................................................... 900
Merchandise Inventory ..............................................
To record cost of sales.
Cash ...........................................................................
3,626
Sales Discounts* .......................................................
74
Accounts Receivable—M. Carpenter ................
To record cash received less discount.*($3,700 x .02)
Accounts Receivable—Aztec ...................................
3,175
Credit Card Expense*(rounded to nearest dollar) .....
65
Sales......................................................................
To record credit card sales less fee. *($3,240 x .02)
Cost of Goods Sold .........................................................1,800
Merchandise Inventory ..............................................
To record cost of sales.
No journal entry required.
Allowance for Doubtful Accounts ...........................
498
Accounts Receivable—Craw Co........................

To write off account due.
Cash ...........................................................................
4,400
Accounts Receivable—Aztec .............................
To record cash rec’d from credit card co. ($1,225+$3,175)

2,000

5,200

2,800

1,250

900

3,700

3,240

1,800

498

4,400

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Problem 7-2B (35 minutes)
2007
a.
Accounts Receivable .........................................
Sales ..............................................................

685,320
685,320

To record sales on account.

Cost of Goods Sold ......................................................
500,000
Merchandise Inventory ..........................................

500,000

To record cost of sales.

b.

Cash .....................................................................
Accounts Receivable ...................................

482,300
482,300

To record cash received on account.

c.

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

9,350
9,350

To record write-off of accounts.

d.

Bad Debts Expense ............................................
Allowance for Doubtful Accounts...............
To record estimated bad debts.

11,287
11,287

*

*Beginning receivables .....................
Credit sales ......................................
Collections .......................................
Write-offs ..........................................
Ending receivables ..........................
Percent uncollectible .......................

Required ending allowance .............
Unadjusted balance .........................
Adjustment to the allowance...........

$

0
685,320
(482,300)
(9,350)
193,670
x 1.0%
1,937** Cr.
9,350 Dr.
$ 11,287 Cr.

** Rounded to nearest dollar

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Problem 7-2B (Concluded)
2008
e.
Accounts Receivable ..........................................

Sales ...............................................................

870,200
870,200

To record sales on account.

Cost of Goods Sold ......................................................
650,000
Merchandise Inventory ..........................................

650,000

To record cost of sales.

f.

Cash ......................................................................
Accounts Receivable ....................................

990,800
990,800

To record cash received on account.

g.

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

11,090
11,090

To record write-off of accounts.

h.

Bad Debts Expense .............................................
Allowance for Doubtful Accounts................
To record estimated bad debts.

9,773
9,773

*

*Beginning receivables ...........................
Credit sales ............................................
Collections .............................................
Write-offs ................................................
Ending receivables ................................
Percent uncollectible .............................
Required ending allowance ...................
Unadjusted balance
Beginning (credit) ................................
$ 1,937
Write-offs (debit) ..................................
11,090
Adjustment to the allowance.................

$ 193,670
870,200
(990,800)
(11,090)
61,980
x 1.0%
620 Cr.

$

9,153 Dr.
9,773 Cr.

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Problem 7-3B (35 minutes)
Part 1
a.

Expense is 2.5% of credit sales
Dec. 31 Bad Debts Expense.............................................. 33,550
Allowance for Doubtful Accounts ................

33,550

To record estimated bad debts
[$1,342,000 x .025].

b.

Expense is 1.5% of total sales
Dec. 31 Bad Debts Expense............................................
Allowance for Doubtful Accts. ....................

35,505
35,505

To record estimated bad debts
[($1,025,000 + $1,342,000) x .015].

c.

Allowance is 6% of accounts receivable
Dec. 31 Bad Debts Expense.............................................. 27,000
Allowance for Doubtful Accounts ................
To record estimated bad debts.*
*

Estimated balance ($575,000 x 6%) .......
Unadjusted balance ................................

$ 34,500 credit
7,500 credit

Required adjustment ..............................

$ 27,000 credit

27,000

Part 2
Current assets
Accounts receivable ....................................
Less allowance for doubtful accounts ......

$575,000
(41,050)*

Or: Accounts receivable (net of $41,050*
uncollectible accounts) ............................
* Adjustment to the allowance .................... $33,550
Unadjusted allowance balance .................
7,500
Adjusted balance ....................................... $41,050

$533,950

$533,950
credit
credit
credit

Part 3
Current assets

Accounts receivable ....................................
Less allowance for doubtful accounts ......
Or: Accounts receivable (net of $34,500**
uncollectible accounts) ............

$575,000
(34,500)**

$540,500

$540,500

** See computations in Part 1c.
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Problem 7-4B (35 minutes)
Part 1
Calculation of the estimated balance of the allowance
Not due: $396,400 x .020 = $ 7,928
1 to 30: 277,800 x .040 = 11,112
31 to 60:
48,000 x .085 =
4,080
61 to 90:

6,600 x .390 =
2,574
Over 90:
2,800 x .820 =
2,296
$27,990

Part 2
Dec. 31 Bad Debts Expense........................................... 31,390
Allowance for Doubtful Accounts .............
To record estimated bad debts.
*

31,390

*

Unadjusted balance ...........................
$ 3,400 debit
Estimated balance ..............................
27,990 credit
Required adjustment .........................
$31,390 credit

Part 3
Writing off the account receivable in 2009 will not directly affect Year 2009
net income. The entry to write off an account involves a debit to Allowance
for Doubtful Accounts and a credit to Accounts Receivable, both of which
are balance sheet accounts. Net income is affected only by the annual
recognition of the estimated bad debts expense, which is journalized as an

adjusting entry. Net income for Year 2008 (the year of the original sale)
included an estimated expense for write-offs such as this one.

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Problem 7-5B (75 minutes)
Part 1
2007
Nov. 1 Notes Receivable—S. Julian ..................................
Accounts Receivable—S. Julian ......................

4,800
4,800

To record note received on account.

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

64
64

To record interest earned [$4,800 x .08 x 60/360].

2008
Jan. 30 Cash ..........................................................................
Interest Revenue* ..............................................
Interest Receivable............................................
Notes Receivable—S. Julian ............................

4,896
32
64
4,800

To record cash received on note with interest.
*[$4,800 x .08 x 30/360]

Feb. 28 Notes Receivable—King Co ................................... 12,600
Accounts Receivable—King Co. ......................

12,600

To record note received on account.

Mar. 1 Notes Receivable—M. Shelley ...............................
Accounts Receivable—M. Shelley ...................

6,200
6,200

To record note received on account.

30 Accounts Receivable—King Co ............................. 12,684

Interest Revenue ...............................................
Notes Receivable—King Co .............................

84
12,600

To record receivable for dishonored note
plus interest [$12,600 x .08 x 30/360].

Apr. 30 Cash ..........................................................................
Interest Revenue ...............................................
Notes Receivable—M. Shelley .........................

6,324
124
6,200

To record cash received on note plus interest
($6,200 x .12 x 60/360 = $124 rounded).

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Problem 7-5B (Concluded)
June 15 Notes Receivable—R. Solon ................................

Accounts Receivable—R. Solon .....................

2,000
2,000

To record note received on account.

June 21 Notes Receivable—J. Felton ................................
Accounts Receivable—J. Felton ....................

9,500
9,500

To record note received on account.

Aug. 14 Cash ........................................................................
Interest Revenue* ............................................
Notes Receivable—R. Solon ..........................

2,027
27
2,000

To record cash received on note plus interest.
*[$2,000 x .08 x 60/360] rounded to nearest dollar

Sept. 19 Cash ........................................................................
Interest Revenue* ............................................
Notes Receivable—J. Felton ..........................

9,714
214
9,500

To record cash received on note plus interest.
*[$9,500 x .09 x 90/360] rounded to nearest dollar

Nov. 30 Allowance for Doubtful Accounts........................ 12,684
Accounts Receivable—King Co .....................

12,684

To record write-off of accounts.

Part 2
Analysis Component: When a business pledges its receivables as security
for a loan and the loan is still outstanding at period-end, the business must
disclose this information in notes to its financial statements. This is a
requirement because the business has committed a portion of its assets to
cover a specific portion of its liabilities, which means that if the business
dishonors its obligations under the loan, the creditor can claim the amount
of receivables identified in the pledge as collateral to cover the loan. This
arrangement must be disclosed to satisfy the full-disclosure principle.

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SERIAL PROBLEM

— SP 7

Serial Problem — SP 7, Success Systems (50 minutes)
1.
a. Bad debts expense is recorded as 1% of total revenues:
$52,195 x .01 = $521.95 which is $522 rounded to nearest dollar.
2008

Mar. 31

Bad Debts Expense ...............................................
Allowance for Doubtful Accounts..................

522
522

To record estimated bad debts.

b. Bad debts expense is recorded as 2% of accounts receivable:
$24,400 x .02 = $488
c.

2008

Mar. 31

Bad Debts Expense ...............................................
Allowance for Doubtful Accounts..................

488
488

To record estimated bad debts.

2. Allowance Balance as of 3/31/08 ................... $488 Cr.
Less: Account written off .............................. (100) Dr.
Allowance Balance as of 6/30/08 ................... $388 Cr. (before adjustment)
Required Balance: $26,500 x .02 = $530
Required Adjustment: $530 - $388 = $142
2008

June 30

Bad Debts Expense ...............................................
Allowance for Doubtful Accounts..................

142
142

To record estimated bad debts.

3. Many small business owners use the direct write-off method of
recording bad debts expense. The direct method is a simple and
straightforward method of accounting for bad debts expense. It can
also be justified if the amounts are immaterial. However, when the
amounts are material, the direct write-off method can result in accounts

receivable overstatements, bad debts expense understatements, and net
income overstatements.
The method required per GAAP is the
allowance method, which will result in the best matching of a period’s
expenses to revenues.

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