Chapter 7 Notes - Class 2.docx

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14 Apr 2012
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Receivables
Must be presented on Balance Sheet at their recoverable amount / realizable value.
Trade receivables should be separately disclosed from
o Related party receivables
o Notes receivables
Accounting for Uncollectible Receivables
i) Direct write-off method
a. Only account for uncollectible Accounts Receivables with they are identified (as they
occur) and record bad debt expense at that time
b. Not GAAP
c. Only appropriate when uncollectible accounts are very small
Journal Entry to write-off accounts:
Bad Debt Expense xx
Accounts Receivables xx
If subsequent collection arises:
Cash xx
Bad Debt Expense xx
ii) Allowance Method
a. GAAP (PEGAAP, IFRS)
b. Consistent with the MATCHING PRINCIPLE
c. Record the expense of bad debt in same period as year of credit sale
d. How: establishing an “Allowance for Doubtful Accounts“ account
i. Contra asset account
ii. Subtract from Accounts Receivable to arrive at net amount
e. Under this method, we estimate bad debt expense and record it at period end as an
adjusting entry
f. When actual uncollectible account is identified;
i. No effect on Income Statement
ii. No effect on net Accounts Receivable
g. 2 methods to calculate Allowance for Doubtful Accounts
i. Sales method
ii. Accounts receivables (aging) method
h. Sales Method
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i. income statement approach
ii. aims to record best estimate of bad debt expense
iii. Bad Debt Expense = Credit Sales x Estimated Uncollectible
Journal Entry:
Bad Debt Expense xx
Allowance for Doubtful Accounts xx
i. Accounts Receivable (Aging) Method
i. Balance Sheet approach
ii. Aims to calculate best estimate of the Allowance for Doubtful Accounts (so that
Accounts Receivable presented is at realizable value)
iii. Requires a review of A/R aged listing at report date and estimate which % in
each aging category is expected to be uncollectible
iv. We calculate the actual Allowance for Doubtful Accounts account, not the bad
debt expense.
Example: Abrams Co. has an aged A/R schedule that show the following balances at December 31:
Total
0 30
31 60
61 90
91 120
120+
200,000
111,500
41,400
38,000
6,600
2500
Est % no
collect
2%
5%
10%
25%
50%
Estimated
Allowance
2,230
2070
3800
1650
1250
E = $16000
Note: If allowance has a debit balance prior to the Allowance for Doubtful Accounts adjustment entry,
we must add this amount to the target Allowance for Doubtful Accounts balance calculated to get the
required adjustment amount
- If the Allowance balance is too high prior to the Allowance for Doubtful Accounts adjusting
entry, we would require a credit to Bad Debt Expense.
Write-offs under the Allowance Method:
- Regardless of the method used to calculate the allowance for doubtful accounts, the entry to
write-off specific accounts is the same.
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