ADM 1340 Lecture 7: Reporting and Analyzing Receivables

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28 Feb 2017

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Accounts receivable are generated when customers buy goods and services from companies on account (credit). No interest, until the balance is not paid in full in the agreed period. Accounts receivables are classified as current assets. The biggest concern is when a company is not able to collect all accounts receivable in full amounts. Direct method violates the matching principle, as seen in chapter 4. The second problem is that you overstate the assets you have because risk is not considered. End of year adjustments are made to estimate the amount of bad debt. Bad debt expense is reported against revenue using adjusting entries. The contra asset account allowance for doubtful accounts estimates the amount of bad debt. Using the allowance method requires that adjusting journal entries at the end. By estimating the amount, you are estimating the amount that is considered uncollectable. We report that by the end of this year we have 60,000$ accounts receivable outstanding.

Related Questions

6. The bad-debt method that uses the accounts receivable agingreport is _______________.

	the bad-debt expense method
	the percentage-of-sales method
	the direct write-off method
	the percentage-of-receivables method

7. When it is determined that too much money has been set asidefor uncollectible accounts, we will _______________.

	credit reserve for uncollectible accounts
	debit accounts receivable
	credit cash
	debit reserve for uncollectible accounts

8. A customer whose account was previously written offunexpectedly pays us. If we are using the allowance method we would_______________.

	debit accounts receivable and credit allowance for uncollectibleaccounts AND debit cash and credit accounts receivable
	debit cash and credit bad-debt expense
	debit reserve for uncollectible accounts and credit cash
	debit bad-debt expense and credit cash

9. When a retailer accepts a bank card (VISA or MasterCard),they will make what entry for the dayâs receipts?

	debit cash and debit âcredit card expenseâ; credit sales
	debit accounts receivable and credit sales
	debit cash and credit sales
	debit accounts receivable; credit sales, and credit âcredit cardexpenseâ

mauvemarten239

What are the pros and cons of extendingcredit?

Define net realizable value.

Bad debt expense should be recorded in same periodas the sale to avoid violating the expense recognition (matching)principle. Under the allowance method an estimate of the bad debtsare recorded and later adjusted. Describe the following twosteps of the allowance method and provide the required journalentries.

Adjust for estimated bad debts

Remove (write off) specific customerbalances

Small companies are allowed to use the direct write-offmethod instead of the allowance method. Explain this method and thecons to using it.

What kind of account is allowance for doubtful accounts?Is it permanent or temporary? Which financial statement can it befound on?

Bad debt expense can be estimated using two differentmethods. Describe each of the below methods and provide an examplejournal entry.

Percentage of sales method

Aging of accounts receivable method

Explain how account recoveries are treated. What is thejournal entry?

What is the difference between a note receivable and anaccount receivable?

What is the formula to calculate interest on a notereceivable? Explain each of the three variables.

Provide the following journal entries:

Establish note receivable

Accrue interest earned

Record interest received

Record principal received

What is the receivables turnover ratio formula and whatdoes it tell you?

What is the days to collect formula and what does ittell you?

The following selected transactions were taken from the recordsof Shipway Company for the first year of its operations endingDecember 31:

Apr. 13

Wrote off account of Dean Sheppard, $5,190.

May 15

Received $2,600 as partial payment on the $6,900 account of DanPyle. Wrote off the remaining balance as uncollectible.

July 27

Received $5,190 from Dean Sheppard, whose account had beenwritten off on April 13. Reinstated the account and recorded thecash receipt.

Dec. 31

Wrote off the following accounts as uncollectible (record asone journal entry):

Paul Chapman	$3,480
Duane DeRosa	2,600
Teresa Galloway	1,560
Ernie Klatt	2,180
Marty Richey	780

Dec. 31

If necessary, record the year-end adjusting entry for theuncollectible accounts.

For those amount boxes in which no entry is required, leave thebox blank. If an entry is not required, select "No entry" from thedropdown box(es).

a. Journalize the transactions under the directwrite-off method.

Apr. 13	Bad Debt Expense
	Accounts Receivable-DeanSheppard
May 15	Cash
	Bad Debt Expense
	Accounts Receivable-DanPyle
July 27-reinstate	Accounts Receivable-DeanSheppard
	Bad Debt Expense
July 27-collection	Cash
	Accounts Receivable-DeanSheppard
Dec. 31-write-off	Bad Debt Expense
	Accounts Receivable-PaulChapman
	Accounts Receivable-DuaneDeRosa
	Accounts Receivable-TeresaGalloway
	Accounts Receivable-ErnieKlatt
	Accounts Receivable-MartyRichey
Dec. 31-adjusting	No entry
	No entry

b. Shipway Company uses the percent of creditsales method of estimating uncollectible accounts expense. Based onpast history and industry averages, 2% of credit sales are expectedto be uncollectible. Shipway Company recorded $1,266,500 of creditsales during the year.

Journalize the transactions under the allowance method.

Apr. 13	Allowance for DoubtfulAccounts
	Accounts Receivable-DeanSheppard
May 15	Cash
	Allowance for DoubtfulAccounts
	Accounts Receivable-DanPyle
July 27-reinstate	Accounts Receivable-DeanSheppard
	Allowance for DoubtfulAccounts
July 27-collection	Cash
	Accounts Receivable-DeanSheppard
Dec. 31-write-off	Allowance for DoubtfulAccounts
	Accounts Receivable-PaulChapman
	Accounts Receivable-DuaneDeRosa
	Accounts Receivable-TeresaGalloway
	Accounts Receivable-ErnieKlatt
	Accounts Receivable-MartyRichey
Dec. 31-adjusting	Bad Debt Expense
	Allowance for DoubtfulAccounts

Feedback

Remember that under the direct write-off method, Bad DebtExpense is not recorded until the customer's account is determinedto be worthless.

Under the allowance method once a customer account is identifiedas uncollectible, it is written off against the allowanceaccount.

Learning Objective 5.

c. How much higher (lower) would ShipwayCompany's net income have been under the direct write-off methodthan under the allowance method?

ADM 1340 Lecture 7: Reporting and Analyzing Receivables

ADM 1340 Full Course Notes

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